USDJPY extends pullback on Trump's trade war, BoJ rate hike odds. What's next?

KEY POINTS:US Dollar weakened across the board on the latest Trump’s trade warJapanese Yen found support from more intense verbal intervention and rate hike expectationsUSD/JPY bounced from a major trendline, now at crossroads.FUNDAMENTAL OVERVIEWUSD:The US Dollar weakened
across the board to start the week following Trump’s escalation over Greenland.
In fact, the US President threatened to impose 10% tariffs starting on February
1 on the UK, France, Germany and a few other European countries unless the U.S.
is permitted to buy Greenland. The tariffs will rise to 25% from June 1 in case
of no deal. As seen last year, risk-off
moves caused by Trump’s tariffs stemmed from growth worries. Growth worries trigger
a selloff in the stock market and in turn a fall in Treasury yields on expected
future weakness in the economy. In terms of monetary
policy, traders now expect 48 bps of easing by year-end following a strong US
jobless claims report last week. The Fed members continue to support the
current patient and data-dependent stance with renewed weakness in labour
market data or bigger than expected easing in inflation needed for earlier rate
cuts. JPY:On the JPY side, last week’s
barrage of verbal intervention from Japanese officials after the
price broke above the 2025 high helped to stop the recent selloff in the yen. Moreover, we got a
Bloomberg report last week saying that the BoJ officials were paying more
attention than before on the weakening yen and its potential impact on
inflation. According to people familiar with the matter, this could have
implication for future rate hikes even though the central bank is likely to
hold rates steady this week. The JPY strengthened on the
news as the odds of a rate hike in March jumped to 22% before receding a bit
afterwards. A hike in March would be much sooner than expected and could keep
the JPY supported in the short-term if speculations of an earlier hike keep
increasing. The central bank is still placing a great deal on wage growth, so
wage data and spring wage negotiations remain key. The market is now pricing
around 46 bps of tightening by year end. USDJPY TECHNICAL
ANALYSIS – DAILY TIMEFRAMEOn the daily chart, we can
see that USDJPY continues to slowly edge lower after failing to sustain the
break above the 2025 high. The sellers piled in once the price fell back below
the 158.87 level to target the 154.50 support. The buyers, on the other hand, will
either wait for the price to break above the 158.87 level again or to come into
the support before stepping in with more conviction.USDJPY TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAMEOn the 4 hour chart, we can
see that we eventually got the pullback into the upward trendline that is
defining the bullish momentum on this timeframe. The buyers stepped in around the
trendline with a defined risk below it to position for a rally into the 160.00
handle. The sellers, on the other hand, will want to see the price breaking
lower to increase the bearish bets into the 154.50 support next.USDJPY TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAMEOn the 1 hour chart, we can
see that we have a minor downward trendline defining the recent pullback. The
sellers will likely lean on the trendline with a defined risk above it to
target a break below the major trendline. The buyers, on the other hand, will
look for a break higher to increase the bullish bets into new highs. The red
lines define the average daily range for today.UPCOMING CATALYSTSTomorrow we have the weekly US ADP jobs data. On Thursday, we get the latest US Jobless
Claims figures. On Friday, we have the Japanese CPI, the BoJ policy decision
and the US Flash PMIs. Keep also an eye on the World Economic Forum in Davos as Trump could post something on Truth Social regarding this latest trade war.
This article was written by Giuseppe Dellamotta at investinglive.com.

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