Dollar Retreats as Fed Rate Cut Bets Rise; Yen Strengthens on BoJ Outlook
By Rania Gule, Senior Market Analyst at XS.com – MENA
The Japanese Yen has recently seen a notable rise against the US Dollar. This move comes as no surprise given a confluence of factors converging at a delicate intersection between a slowing US economy and a cautiously hawkish stance from the Bank of Japan. In my view, this shift reflects a new reality in the balance of monetary power between the two economies, as early signs of dollar weakness emerge amid disappointing economic data. At the same time, Japan gradually leans toward measured monetary tightening. This broader macroeconomic shift supports the case for a potential realignment in exchange rate trends in the short to medium term.
The US labour market data, particularly the ADP employment report, which showed only 37,000 new jobs in May compared to expectations of over 110,000, sends a clear signal of waning momentum. Adding to the pressure is the ISM Services PMI reading, which fell below the 50-point threshold—the line dividing expansion from contraction—suggesting that the largest sector of the US economy may be entering a slowdown. These indicators are pressuring the Federal Reserve to consider rate cuts sooner than previously expected, potentially even before the September meeting, as recession risks become more evident through the lens of labour market weakness.
Given these developments, interest rate expectations are now playing a critical role. Markets are already pricing in nearly a 60% probability of a rate cut in September. This shift in monetary sentiment is reducing the appeal of the US dollar, particularly against the yen, which has long served as a haven in times of economic and geopolitical stress. With the 10-year US Treasury yield dipping below 4.36%, downward pressure on USD/JPY continues to build, especially as the pair breaks below the 143.00 support level and edges toward 142.60, with the possibility of deeper declines.
On the other side of the equation, the Bank of Japan is emerging as an active player in the monetary landscape, driven by domestic inflation that is steadily approaching the 2% target. Although Governor Ueda remains cautious, his recent statements hint at a gradual path toward tightening if inflation maintains its upward trajectory. This supports the yen not just from a sentiment perspective, but also by narrowing the yield gap between US and Japanese government bonds—historically a key driver of USD/JPY movement.
Nonetheless, challenges remain. The US has announced new tariffs of up to 50% on aluminium and steel imports, a move that poses a direct threat to Japan’s export-heavy industries and may drive up production costs, translating into imported inflation. This type of “unproductive” inflation complicates the BOJ’s task of balancing inflation control with economic growth, especially amid weakening external demand. Thus, while the BOJ may be tilting toward rate hikes, its room for manoeuvre could remain limited, capping the yen’s long-term upside if dollar weakness eases.
Capital flow trends also favour the yen, as investor appetite for safe-haven assets remains strong in an environment of geopolitical uncertainty and global market volatility. When the VIX spikes and equity markets falter, investors often turn to the yen and gold—a pattern we’ve seen in recent weeks. This correlation is not coincidental; it reflects a structural linkage rooted in risk aversion and a preference for stability.
Considering all these factors, I believe the broader trend for USD/JPY in the coming months points toward further downside, with potential to reach 141.00 if labour market weakness persists and Treasury yields fall below 4.30%. Conversely, a positive surprise in US inflation or growth data could lead to a limited rebound toward 143.40–144.20, especially if yields rise back above 4.44%. Still, the path of least resistance currently appears to favour the yen, at least in the short to medium term.
In conclusion, we are at a monetary crossroads, reflecting a fragile balance between major economies oscillating between slowdown and tightening. The dollar’s retreat is not only a function of domestic weakness but also a sign of a gradual policy shift in Japan. As trade and geopolitical factors continue to unfold, market sentiment may continue to favour the yen, not just as an anti-dollar play, but as a strategic choice in any portfolio shaped by caution and hedging for the uncertain future.
Technical Analysis of ( USDJPY ) Prices:
The 4-hour chart of the USD/JPY pair shows a clear classic technical pattern of the “Head and Shoulders” type, with a neckline break near the 142.40 level, which reinforces the likelihood of the downtrend continuation. After the price failed to hold above the psychological resistance area around 144.00, the pair retested the critical support zone near 142.00, aligning with a previous support level (S1) that represents the base of a prior double bottom. If this level is decisively broken with a clear daily close, it could pave the way for further decline toward the 141.00 level as the initial target, and possibly even 140.00 should selling pressure accelerate.