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USD/JPY Outlook Hinges on Federal Reserve Rate Decision

Article By: ,  Strategist
January 28, 2025 5:15 PM

US Dollar Outlook: USD/JPY

The Federal Reserve rate decision may sway the near-term outlook for USD/JPY as the central bank is expected to keep US interest rates on hold.

USD/JPY Outlook Hinges on Federal Reserve Rate Decision

Keep in mind, USD/JPY showed a limited reaction to the Bank of Japan (BoJ) meeting even though the central bank delivered at 25bp rate-hike, and the recent weakness in the exchange rate may turn out to be temporary as Governor Kazuo Ueda and Co. warn that ‘there remain high uncertainties, both upside and downside, surrounding Japan's economic activity and prices.’

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In turn, USD/JPY may continue to hold above the weekly low (153.72) as it no longer carves a series of lower highs and lows, and speculation surrounding Fed policy may sway the exchange rate as the BoJ seems reluctant to carry out rate-hike cycle.

US Economic Calendar

Meanwhile, the Federal Open Market Committee (FOMC) is anticipated to keep US interest rates in the current threshold of 4.25% to 4.50% at its first meeting for 2025, and market participants may pay increased attention to the forward guidance for monetary policy as ‘the median participant projects that the appropriate level of the federal funds rate will be 3.9 percent’ at the end of 2025.

As a result, more of the same from the FOMC may produce headwinds for the Greenback as the central bank pursues a neutral policy, but Fed officials may adjust the forward guidance as the US economy shows little signs of a recession.

With that said, USD/JPY may attempt to retrace the decline from the monthly high (158.88) should Chairman Jerome Powell and Co. adopt a less-dovish forward guidance, but the exchange rate may struggle to retain the rebound from the weekly low (153.72) if the Fed stays on track to implement lower US interest rates.

USD/JPY Price Chart – Daily

Chart Prepared by David Song, Senior Strategist; USD/JPY on TradingView

  • USD/JPY attempts to retrace the decline from the start of the week amid the failed attempt to close below 153.80 (23.6% Fibonacci retracement), and a move/close above 156.50 (78.6% Fibonacci extension) may push the exchange rate towards the monthly high (158.88).
  • Next area of interest comes in around 160.40 (1990 high), but USD/JPY may face range bound conditions should it track the flattening slope in the 50-Day SMA (154.89).
  • At the same time, a close below 153.80 (23.6% Fibonacci retracement) may push USD/JPY towards 151.95 (2022 high), with the next region of interest coming in around 148.70 (38.2% Fibonacci retracement) to 150.30 (61.8% Fibonacci extension).

Additional Market Outlooks

GBP/USD Breaks Above Weekly Range to Eye Monthly High

USD/CAD Remains Vulnerable to Trump Trade Policy Ahead of Fed Meeting

Gold Price Rally Fizzles to Keep RSI Below Overbought Zone

AUD/USD Recovery Stalls Ahead of Monthly High

--- Written by David Song, Senior Strategist

Follow on Twitter at @DavidJSong

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