USD/JPY Wrongfoots Bears Ahead of BoJ, Nikkei Looks in Trouble

Volatility cut both ways for the euro and Swiss franc on Wednesday, while the US dollar was the strongest FX major. Sterling slid after soft UK inflation revived expectations of another Bank of England cut, while the US dollar firmed broadly ahead of key US data. Meanwhile, USD/JPY wrongfooted bears despite a widely expected Bank of Japan hike, and Nikkei futures showed signs of a deeper corrective phase.

View related analysis:

USD/JPY and Nikkei Outlook Ahead of Key Central Bank Risk

It was a volatile day for the British pound after weak inflation data put another BoE rate cut firmly back on the radar, with markets pricing a near-100% chance of a 25bp cut on Thursday. GBP/USD fell as much as 0.9% before recouping around half of the day’s losses, leaving an elongated bearish hammer on the daily chart. AUD/USD fell for a fifth day during its most volatile session in a month, with a high-to-low range of 1.1%

Chart analysis by Matt Simpson - data source: LSEG

Divisions within the Fed remain evident. Governor Waller again reiterated his preference for lower interest rates, contrasting with comments from Bostic the previous day, who argued a cut is not warranted. Market pricing is erring on the side of caution following last week’s not-so-dovish Fed cut, with the dot plot leaving room for just a single 25bp cut in 2026. Money markets price a 75.6% chance of a hold in January and a 44.8% chance of a 25bp cut in March.

Incoming data will shape those expectations, with CPI and jobless claims due today and consumer sentiment scheduled for Friday. The US dollar index was the strongest major currency on Thursday, while the Japanese yen was the weakest, despite expectations for the Bank of Japan to hike by 25bp tomorrow. The move appears fully priced, leaving little room for surprise unless the usually tight-lipped BoJ signals future cuts at the meeting — which looks unlikely.

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

Despite expectations of a BoJ hike, options traders are turning more bullish on USD/JPY, with risk reversals rising to show calls gaining relative to puts. With the US dollar hinting at a swing low — printing a bullish pin bar on Wednesday followed by a small bullish candle on Thursday — and USD/JPY posting a solid bullish daily bar, upside risks appear greater than I anticipated in yesterday’s report.

The daily chart shows a decent rebound from support, keeping the 156.16 high in focus. However, a small rising wedge has formed on the 1-hour chart, alongside bearish divergences on both RSI (2) and RSI (14), which warns of a near-term pullback. Bulls could look to buy dips towards 155.29 or the broader 155.00–155.10 zone in anticipation of another leg higher. A break above 156.20 would open the door for a move back towards the 157 highs.

My bias on USD/JPY remains bullish while prices hold above 154.30. That said, the Bank of Japan meeting is tomorrow, which could lift volatility if policymakers deliver a hawkish hike and strengthen the Japanese yen (pushing USD/JPY lower).

Chart analysis by Matt Simpson - data source: TradingView USD/JPY

Nikkei 225 Futures (NK) Technical Analysis

The Nikkei appears to be in a three-wave corrective phase following its strong rally above 50,000, which topped out in early November. Last week’s second consecutive (and minuscule) doji has been followed by a clear bout of bearish range expansion this week, signalling that the index has likely entered wave C of an ABC retracement.

This opens the door for a move below 48,000. A 100% projection of wave A measured from wave B sits just above 46,000, making it a plausible downside target for bears should 48,000 give way. The November low is now back in focus, particularly after the Nikkei met resistance near both its 50-day SMA and the psychologically important 50,000 handle.

Chart analysis by Matt Simpson - Source: TradingView, Nikkei Futures (NKD1!)

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.

Delayed London Stock Exchange (LSE) Data

The London Stock Exchange (LSE) market data displayed or referenced on this website is provided on a delayed basis and is not in real time. The delay period may vary but is typically at least 15 minutes. This data is intended for information purposes only and should not be relied upon for trading, investment, or other financial decisions. We do not guarantee the completeness, reliability, or suitability of the data for any particular purpose. Users should consult real-time data sources and obtain professional advice before making any financial decisions.