USD/JPY Trends: Yen Strengthens Amid Trade Uncertainty
The USD/JPY pair had a bearish month in February as the yen strengthened against the dollar, primarily due to safe-haven demand. Uncertainty regarding Trump’s tariff plans pushed traders to safer currencies.
Although the general trend in the last month was down, there were times when the price rose.
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Catalysts Behind USD/JPY Fluctuation
The rise in the USD/JPY pair came after better-than-expected economic data from the US. The US released upbeat reports on employment and consumer inflation in January that lowered expectations for Fed rate cuts this year. Job growth came in slightly below estimates in January. However, the unemployment rate fell, indicating increased demand for labor. Meanwhile, inflation jumped more than expected, confirming the Fed’s fears that the downtrend had paused.
At the same time, the dollar had moments of strength against the yen when Trump announced new tariffs. The US President imposed tariffs on steel and aluminum goods, brightening US production and demand prospects. As a result, the dollar gained.
However, the pair maintained a downward trajectory as market participants sought safety amid tariff uncertainty. At the same time, upbeat data from Japan increased expectations for Bank of Japan rate hikes, boosting the yen.
The BoJ’s core CPI figure rose from 1.9% to 2.2%, beating estimates and indicating a more conducive environment for rate hikes. Similarly, Japan’s National core CPI came in higher than expected. Meanwhile, GDP data revealed an unexpectedly significant expansion in the fourth quarter.
The Bank of Japan has patiently waited for consumption in Japan’s economy to recover and inflation to increase. Together with stronger wage growth, these will convince policymakers to implement more rate hikes this year. This will shrink the rate gap between the US and Japan, boosting the yen.
Meanwhile, Trump went on with his tariff threats, which caused worries about a global trade war, pushing investors to the safe yen. The US president has promised a reciprocal tariff, a 25% tariff on Canada and Mexico, and a likely 25% tariff on cars and goods from Europe.
Consequently, there are fears that these countries will respond in kind, leading to a global trade war. Such an outcome would hurt the global economy.
Policy and Economic Shifts in the US and Japan
Several policy and economic changes in the last month have impacted the USD/JPY price.
US
The first economic report from the US revealed an unexpectedly small economic expansion in the fourth quarter of 2024. The economy expanded by 2.3% compared to forecasts of a 2.7% expansion. This was bearish for the dollar as it raised expectations for Fed rate cuts. As a result, USD/JPY fell.
The next report was on employment and revealed slower job growth in January. The economy added 143,000 jobs compared to expectations of 169,000. However, the unemployment rate unexpectedly fell to 4.0%, indicating solid demand for labor. As a result, the dollar rose.
The last major report was on inflation, showing an unexpectedly hot figure of 0.5% in January. Economists had expected inflation to increase by 0.3%. This report lowered Fed rate cut expectations, boosting the dollar.
Meanwhile, on the policy front, the FOMC meeting resulted in a pause as policymakers kept interest rates unchanged. Moreover, the tone was cautious due to the uncertainty around Trump’s tariff plans.
Japan
In Japan, market participants focused mostly on economic reports. Data revealed that Japan’s economy expanded by 2.8% in Q4, well above estimates of 1.0%. This boosted the yen, leading to a drop in USD/JPY.
Meanwhile, Japan’s National core CPI increased by 3.2%, beating estimates of 3.1%. The increase also raised expectations for BoJ rate hikes, boosting the yen.
Finally, the Bank of Japan released its core CPI figure, which increased by 2.2% compared to estimates of a 2.0% increase. This was yet another inflation report that supported BoJ rate hike expectations.
What Lies Ahead for USD/JPY
In the coming month, market participants will monitor tariff developments in the US. If Trump keeps imposing new tariffs, the risk of a global trade war will increase, pushing more traders to the yen. Therefore, the downtrend would continue.
At the same time, market participants will watch economic reports from Japan and the US. If Japan’s economy continues beating expectations, BoJ rate hike bets will increase, supporting the yen. On the other hand, a strong US economy will lower Fed rate cut expectations, boosting the dollar. Experts believe both economies will remain steady. Trump’s policies will increase demand in the US economy. Meanwhile, Japan’s recovery might continue.
Moreover, traders will focus on the March Bank of Japan policy meeting. A robust economy will increase bets for a rate hike at this meeting. On the other hand, downbeat data could increase the likelihood of a pause. Another rate hike would propel the yen, pushing USD/JPY lower.
Technical Outlook: Gauging Bearish Momentum
On the technical side, the USD/JPY price has paused its decline at a solid support zone. Bears are facing the 0.5 Fib retracement level and the 149.50 key support. However, indicators on the chart show that bears might break below this zone. The price trades far below the 22-SMA, indicating that bears have a strong lead. At the same time, the RSI trades near the oversold region, showing solid bearish momentum.
A break below the support zone will allow USD/JPY to test lower Fib levels. At the same time, it will clear the path to the 140.02 support level. However, before the price makes such moves, it might rebound to retest the 22-SMA as resistance before continuing lower. The bearish bias will remain strong if the SMA stays below the 22-SMA and the RSI below 50. A break above the 22-SMA at any point will signal a bullish shift in sentiment, likely leading to a reversal.
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