USD/JPY Price Forecast: Bears turn cautious as focus shifts to US inflation figures

• USD/JPY drops to a fresh multi-month low and is pressured by a combination of factors.
• BoJ rate hike bets and the risk-off mood underpin the JPY despite weaker Japan Q4 GDP.
• Dovish Fed expectations keep the USD depressed and further exert pressure on the pair.

The USD/JPY pair prolongs its recent well-established downtrend and drops to the lowest level since early October, around mid-146.00s during the first half of the trading action on Tuesday. Concerns about US President Donald Trump's tariffs and a potential global trade war continue to weigh on investors' sentiment. This is evident from a generally weaker tone around the equity markets, which, along with hawkish Bank of Japan (BoJ) expectations, underpins the safe-haven JPY. Apart from this, the underlying bearish tone surrounding the US Dollar (USD) exerts additional downward pressure on the currency pair. 

Traders now seem convinced that the BoJ will hike interest rates again amid the broadening inflation in Japan and hopes that bumper wage hikes seen last year will continue this year. In fact, BoJ Deputy Governor Shinichi Uchida signaled last week that the central bank was likely to raise interest rates at a pace in line with dominant views among market players and economists. Moreover, a sluggish demand at an auction of five-year debt, amid the view that rates will keep going up, lifted the yield on the benchmark 10-year Japanese government bond (JGB) to its highest level since October 2008 at the start of the current week. 

This, to a larger extent, offsets the downward revision of Japan's GDP print, which showed that the economic growth slowed to 2.2% on an annualized basis in the fourth quarter. This was lower than the initial estimate of a 2.8% rise, though it does little to dent demand for the JPY. The USD, on the other hand, languishes near its lowest level since November amid concerns about a tariff-driven slowdown in the US, which might force the Federal Reserve (Fed) to lower borrowing costs multiple times this year. This keeps the US Treasury bond yields depressed and the resultant narrowing of the US-Japan rate differential favors the JPY bulls. 

Traders, however, might opt to wait for this week's release of the latest US inflation figures before placing fresh directional bets. The US Consumer Price Index (CPI) and the Producer Price Index (PPI) are due on Wednesday and Thursday, respectively. The crucial data will play a key role in influencing expectations about the Fed's rate-cut path, which, in turn, will drive the USD demand and provide some meaningful impetus to the USD/JPY pair. In the meantime, the US Job Openings and Labor Turnover Survey (JOLTS) could produce short-term opportunities later during the North American session on Tuesday.

USD/JPY daily chart

Technical Outlook

From a technical perspective, last week's breakdown below the 148.70-148.60 horizontal support was seen as a key trigger for bearish traders. That said, the Relative Strength Index (RSI) on the daily chart remains close to oversold territory and makes it prudent to wait for some near-term consolidation or a modest bounce before positioning for further losses. Nevertheless, the broader setup suggests that the path of least resistance for the USD/JPY pair remains to the downside.

Hence, any meaningful recovery beyond the daily swing high, around the 147.40 region, could be seen as a selling opportunity near the 148.00 round figure. This, in turn, should cap the USD/JPY pair near the aforementioned support breakpoint, now turned strong barrier near the 148.60-148.70 area. A sustained strength beyond the latter, however, might trigger a short-covering rally towards the 149.00 mark en route to the 149.70-149.75 region and the 150.00 psychological mark.

On the flip side, the daily swing low, around the 146.55-146.50 region, now seems to protect the immediate downside, below which the USD/JPY pair could accelerate the fall further towards the 146.00 round figure. The downward trajectory could eventually drag spot prices to the 145.00 psychological mark with some intermediate support near the 145.40-145.35 zone.