The Japanese Yen (JPY) has extended its winning streak against the US Dollar (USD) for the third consecutive session as of Monday’s Asian trading hours, with the USD/JPY pair retreating below the mid-143.00s. This move highlights the growing strength of the Yen, driven by a combination of monetary policy divergence, renewed safe-haven demand, and positive trade signals between Japan and the United States. 

As macroeconomic and geopolitical factors align in favor of the JPY, the pair’s outlook continues to favor a downside bias. In this article, TelaraX brokers thoroughly unpack this subject.

BoJ-Fed Policy Divergence Drives JPY Upside

At the core of the JPY’s advance is the growing policy divergence between the Bank of Japan (BoJ) and the Federal Reserve (Fed). The Tokyo Consumer Price Index (CPI) released on Friday beat expectations and remained above the BoJ’s 2% inflation target for the third year running. 

Persistent core inflation pressures, particularly in the food sector, add to the narrative that the BoJ will maintain or even tighten its monetary policy, marking a rare hawkish stance after decades of ultra-loose policies.

Meanwhile, in contrast, US inflation shows signs of cooling. The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, declined to 2.1% YoY in April, down from 2.3% in March. The core PCE, which strips out volatile energy and food prices, also slowed to 2.5%, down from 2.7%. 

These readings have reinforced market expectations for rate cuts later this year, with traders now pricing in a September reduction, followed potentially by another in December.

Geopolitical and Risk-Off Environment Favors the Yen

The safe-haven appeal of the Japanese Yen has also come back into focus. Recent global geopolitical tensions have reignited demand for low-beta currencies like the JPY. Notably:

• Ukraine launched one of its largest drone attacks on Russian air bases, reportedly destroying more than 40 aircraft.
• Russia responded with a missile and drone barrage just ahead of peace talks in Istanbul.
• Israel ramped up military strikes in the Gaza Strip, while Houthi rebels in Yemen claimed responsibility for a missile attack on Ben Gurion Airport.

This backdrop of escalating global conflict increases risk aversion, enhancing the JPY’s defensive profile and attracting investor flows into safer assets.

Positive Developments on the US-Japan Trade Front

Another supportive tailwind for the Yen is the improving tone in US-Japan trade negotiations. Japan’s top trade negotiator, Ryosei Akazawa, announced that discussions with the US administration are progressing toward a trade agreement, potentially by the end of this month. The two sides are expected to convene again ahead of the upcoming G7 leaders’ summit.

Trade optimism has coincided with protectionist rhetoric out of the US, with the US President announcing an increase in steel tariffs from 25% to 50%, while accusing China of violating its trade commitments. As the USD faces broader uncertainty related to tariff policy and international trade tensions, the Yen benefits from positive bilateral expectations.

Technical Analysis: Bearish USD/JPY Momentum Builds

From a technical standpoint, the USD/JPY pair shows signs of increasing bearish momentum. Last week’s failure near the 61.8% Fibonacci retracement of the recent decline from the monthly high, combined with a break below the 200-period Simple Moving Average (SMA) on the 4-hour chart, confirms a downside structure.

Technical oscillators across both hourly and daily timeframes are tilting negative, reinforcing bearish conviction. If the current trajectory continues, the pair could test support near the 143.00 round figure, followed by 142.40, and eventually the monthly low at 142.10.

On the upside, any immediate rebound may encounter resistance at the 200-period SMA, now sitting just below 144.00. Should the pair clear this level, the next barriers reside at 144.25–144.30, followed by a potential retest of the 145.00 psychological mark. A break above would target 145.65, and possibly 146.00–146.30, where a recent two-week peak was registered.

Outlook: Yen Strength Likely to Persist

Looking ahead, the trajectory for the Japanese Yen appears constructively bullish, underpinned by:

• Strong domestic inflation data and hawkish BoJ policy expectations.
• Weakened USD sentiment due to anticipated Fed rate cuts.
• Persistent geopolitical unrest bolsters safe-haven flows.
• Progress in US-Japan trade relations, improving external sentiment toward Japan.

Traders and investors are also closely watching the upcoming slate of US economic indicators, starting with the ISM Manufacturing PMI, followed by appearances from Fed Chair Jerome Powell. These events could inject volatility into the pair but are unlikely to reverse the underlying bearish pressure on the USD/JPY unless there’s a major hawkish surprise from the Fed.

Conclusion

In summary, the Japanese Yen’s relative strength looks set to extend further, with macroeconomic fundamentals, geopolitical risk, and technical setups aligning in favor of the JPY. For the USD/JPY pair, the path of least resistance remains to the downside, with the potential for a test of key support zones in the coming sessions.