USDJPY Dips on Thursday as Dollar Finds Modest Strength
The Japanese Yen (USDJPY) edged lower against the US Dollar (USD) during the Asian trading hours on Thursday, extending its intraday decline despite mounting speculation that the Bank of Japan (BoJ) could hike interest rates again this year. The USD/JPY pair climbed above the key 143.00 level, marking a fresh daily high near 143.15. However, despite the upward push, traders remain cautious about chasing the rally amid mixed macroeconomic cues and diverging policy expectations between the BoJ and the US Federal Reserve (Fed).
BoJ Rate Hike Bets Hold Steady Despite Weak Real Wages
At the heart of the JPY’s resilience lies the growing expectation that the BoJ will continue tightening its monetary policy. Thursday’s Japanese government wage data showed nominal wages rising 2.3% year-on-year in April the fastest pace in four months and the 40th consecutive monthly increase. This offers some support to the BoJ’s case for further rate normalization.
However, the shine taken off by the deeper reality: real wages adjusted for inflation dropped by 1.8% in April, marking a fourth consecutive monthly decline. Despite surging nominal pay, persistently high consumer prices are eroding workers’ purchasing power, complicating the BoJ’s policy path.
Japan’s inflation data also remained sticky. The consumer inflation rate used to adjust real wages eased only slightly to 4.1% in April, down marginally from 4.2% in March. Notably, this marks the fifth consecutive month that inflation has held above 4%, further strengthening the view that the BoJ’s ultra-loose monetary era is ending — slowly but surely.
Fed Dovish Signals Curb USD Strength
On the other side of the Pacific, the Fed is grappling with signs of a slowing US economy. Wednesday’s soft US data fueled speculation that the Fed might pivot to interest rate cuts sooner than previously anticipated. Private sector job creation came in far weaker than forecast: the ADP report showed just 37,000 jobs were added in May — the lowest monthly print since March 2023. To compound the weak print, April’s already modest figure was revised downward to 60,000.
Meanwhile, the ISM Services PMI dropped below 50, signaling contraction in the US services sector for the first time in nearly a year. With such signs of cooling, market participants are increasingly pricing in a Fed rate cut as early as September, a move that would typically weaken the USD.
Bond markets responded in kind, with yields on the 2-year and 10-year Treasuries falling to their lowest levels since May 9. This drop in yields further weighed on the greenback, though the USD/JPY pair managed to stay afloat due to a lack of follow-through selling pressure on the dollar.
Geopolitical Risk Keeps USDJPY from Falling Too Far
Despite the Yen’s drop on Thursday, a range of risk-off factors are cushioning its decline. As a traditional safe-haven currency, the JPY often benefits from global uncertainties — and there’s no shortage of them at the moment.
Market sentiment is being rattled by a flare-up in US-China trade tensions. Traders are closely watching whether a call between US President Donald Trump and Chinese President Xi Jinping will materialize in the coming days. Trump’s recent remarks — stating it’s “extremely hard” to negotiate with Xi — have kept markets uneasy. While nothing has been confirmed, any escalation in trade tensions could drive investors back into safe-haven assets, including the Yen.
Moreover, broader geopolitical concerns — including tensions in the Middle East, Ukraine, and US fiscal instability — continue to add a layer of risk aversion. In such an environment, the JPY could attract buying interest even without central bank intervention.
Trump-Powell Tensions Put Fed Independence in the Spotlight
Adding to the uncertainty, President Trump has again turned up the pressure on Fed Chair Jerome Powell, pushing for faster interest rate cuts. The political interference narrative is gaining traction as the US gears up for the 2025 election cycle. This dynamic could complicate the Fed’s messaging and weigh on the dollar if markets perceive a loss of central bank independence.
Such political friction could also strengthen the JPY’s safe-haven appeal. Any sign of the Fed bowing to political will rather than responding to economic data could increase volatility across markets, boosting demand for the Yen.
USDJPY Direction Hinges on Data and Diplomacy
Looking ahead, traders will focus on several key data releases and events that could steer the USD/JPY pair. Thursday’s US Weekly Jobless Claims figures and a slate of speeches from Federal Open Market Committee (FOMC) officials could offer near-term direction.
However, the main event will be Friday’s US Nonfarm Payrolls (NFP) report. With markets now sensitive to labor market weakness, any downside surprise could trigger a selloff in the USD and send USD/JPY lower.
Additionally, any updates regarding the potential Trump-Xi call could have market-moving implications. A breakdown in talks — or a confirmation of no planned communication — could increase trade war fears and boost the JPY.
BoJ-Fed Divergence: A Delicate Balance for USDJPY
Ultimately, the USDJPY exchange rate remains at the mercy of diverging monetary policy expectations. While the BoJ appears to be inching toward further rate hikes, the Fed is leaning dovish. This divergence creates a tug-of-war effect on the currency pair.
The risk-reward tradeoff is delicate. Traders are reluctant to go long on the USDJPY pair given rising geopolitical tensions and the looming Fed pivot. At the same time, persistent inflation and wage stagnation in Japan could limit JPY strength unless global risk sentiment shifts sharply in favor of safe havens.
Technical Outlook: Can USDJPY Sustain Above 143.00?
From a technical standpoint, the USD/JPY pair’s recent break above the 143.00 threshold may appear bullish, but the move lacks strong momentum. Resistance now lies near 143.50, with a break above potentially opening the door to 144.00.
On the downside, support is seen near the 142.40-142.00 zone. A break below this region could invite fresh selling pressure and push the pair toward the 141.50 level.
Momentum indicators currently mixed, reflecting the broader uncertainty in macroeconomic fundamentals and geopolitical risks.
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