USD/JPY Retreats as Yen Shorts Unwind on BOJ Tightening Speculation
On Tuesday, USD/JPY snapped its six-day rally, sliding to a low of 153.17 during New York trading after peaking at 154.34 in Asian markets earlier. The decline was driven by a mix of risk-averse sentiment, weaker U.S. equities, and falling oil prices ahead of Wednesday’s Federal Reserve meeting. Additionally, yen shorts unwound positions as speculation of potential Bank of Japan (BOJ) tightening in early 2025 gained momentum. One-week risk reversals showed increasing demand for downside yen protection, reflecting the market’s cautious stance. Supporting the yen further, Japan’s parliament approved a $90 billion supplementary budget aimed at addressing inflation, intensifying expectations of a BOJ policy shift sooner than anticipated.
Technical Analysis: Key Levels in Focus
From a technical perspective, USD/JPY is approaching a critical support zone between 152.12 and 152.31. This range encompasses several significant indicators, including the 200-day moving average (DMA), the top of the daily Ichimoku cloud, the 50-DMA, and the 21-DMA. A failure to maintain levels above this zone could signal a shift in momentum, opening the door for a deeper decline toward 151.50. For bulls to regain control, the pair needs to clear resistance at 154.48 (Monday’s high) and the psychological barrier of 155. Without a breakout above these levels, the thickening daily Ichimoku cloud is likely to act as a base for continued range-bound trading. However, the immediate bias leans bearish unless the support zone holds.
Fed and BOJ Decisions Awaited
Market attention now shifts to the upcoming Federal Reserve and Bank of Japan decisions. The Fed is widely expected to keep interest rates steady, but its commentary on inflation and future rate adjustments will be critical. Any dovish signals could weigh on U.S. Treasury yields and limit USD/JPY upside. Meanwhile, the BOJ is also expected to hold its current policy, but rising speculation about potential tightening in the first quarter of 2025 may lend further support to the yen. If risk sentiment continues to weaken, this could amplify yen strength. A decisive close below 152.12 would likely shift momentum in favor of yen bulls, while a recovery above 155 remains a challenging hurdle for now.