Japanese yen retreats from one-month highs against the US dollar; USD/JPY flat lines above the mid-155.00 areas

• The Japanese yen is falling after rising to its highest level in more than a month against the US dollar.
• Initial reaction to Trump’s tariff comments is fading amid bets on another interest rate hike by the Bank of Japan.
• The US dollar’s modest recovery from a two-week low is acting as a tailwind for the USD/JPY pair.

The Japanese Yen (JPY) is falling after hitting a one-month high against its US counterpart and flat lines during the early European session on Tuesday. The generally positive tone around stock markets turned out to be a major factor in undermining the safe-haven Japanese yen. This, coupled with a modest recovery in the US Dollar (USD) from a two-week low, is helping the USD/JPY pair move back above the mid-155.00 areas.

However, any meaningful decline in the value of the Japanese yen appears limited following rising bets that the Bank of Japan will raise interest rates later this week. Furthermore, US President Donald Trump’s comments on tariffs have revived trade war fears, which, along with lower US Treasury yields, should help limit the Japanese yen’s losses. Traders may also choose to wait for the crucial two-day Bank of Japan meeting that begins on Thursday.

The Japanese yen oscillates between tepid gains and slight losses against the US dollar amid mixed signals

• Recent hawkish comments from Bank of Japan Governor Kazuo Ueda and Deputy Governor Ryozo Himeno, coupled with rising inflationary pressures in Japan, have raised the odds of an imminent rate hike by the BoJ. Markets expect an 80% chance of a rate hike later this week.
• According to people familiar with the matter, the Bank of Japan will reach the final conclusion after studying economic data, markets and the implications of US economic policies. The view among officials is that US President Donald Trump could upset markets or change expectations about the global economy.
• Trump said Tuesday that he intends to impose 25% tariffs on Canada and Mexico, and the target date for the tariffs would be early February. Trump’s comments raise concerns about inflation, which could force the Federal Reserve to stick to its hawkish stance and lead to a sharp rebound for the US dollar from its lowest level in two weeks.
• Japanese Finance Minister Katsunobu Kato said on Tuesday that he expects the Bank of Japan to implement appropriate monetary policies to achieve the 2% inflation target. Kato added that Japan will respond appropriately after studying the policies of the new US president and will closely monitor the impact of US policies on the global economy and Japan.
• Atsushi Mimura, Japan’s deputy finance minister for international affairs and chief foreign exchange official, said Tuesday that the outlook for the U.S. economy is consistent with Trump’s macroeconomic policies. Mimura added that we should watch closely whether China’s recent export strength will continue.
• The US Producer Price Index (PPI) and Consumer Price Index (CPI) released last week indicated signs of declining inflation. This suggests that the Fed may not rule out the possibility of lowering interest rates by the end of this year, which is keeping US Treasury yields low and acting as a headwind for the dollar.
• There are no relevant market-moving economic data scheduled for release on Tuesday, either from Japan or the United States. Furthermore, focus remains on the Bank of Japan’s long-awaited two-day policy meeting starting Thursday, which will play a key role in determining the near-term path for the Japanese yen.

USD/JPY continues to show some resilience below the support of the uptrend channel

From a technical perspective, the USD/JPY pair continues to show some resilience below the 155.00 level and has so far managed to defend the support that represents the lower limit of the multi-month upward channel. This makes it wise to wait for a breakout and convincing acceptance below the mentioned support levels before setting positions to extend the recent decline from a multi-month high. Spot prices may then accelerate the slide towards the 154.50-154.45 intermediate support on its way to the round 154.00 figure, mid-153.00 areas, and 153.00 mark.

On the flip side, the peak of the Asian session, around the 156.25 region, now appears to be acting as an immediate hurdle. Some subsequent buying after the overnight swing high, around the 156.58-156.60 area, may allow USD/JPY to reclaim the 157.00 mark. The recovery momentum could extend towards the 157.25-157.30 area on its way to the 157.60 area and the round figure of 158.00. Sustained strength beyond the latter could pave the way for a move towards a retest of the multi-month peak, around the 159.00 area touched on January 10.