• The Japanese yen is retreating after rising to its highest level in over a month against the US dollar.
• Initial reaction to Trump’s tariff comments is fading amid expectations of another BOJ rate hike.
• The USD’s modest rebound from its two-week low acts as a tailwind for the USD/JPY pair.

The Japanese yen (JPY) is retreating after hitting a monthly high against its US counterpart and holding steady lines during the European session on Tuesday. The key factor undermining the secure haven JPY is proving to be the overall positive tone in equity markets. This, along with the United States Dollar (USD)’s moderate rebound from its two-week low, is helping the USD/JPY pair return above the mid-155.00 mark.

Any significant yen depreciation appears restricted, however, amid growing expectations that the Bank of Japan (BoJ) will raise interest rates later this week. Additionally, U.S. President Donald Trump’s tariff remarks have revived trade war fears, which, along with falling U.S. Treasury yields, should lend a hand limit losses for the yen. Traders may also decide to wait for the key two-day BoJ meeting that starts on Thursday.

The Japanese yen is swinging between moderate gains and modest losses against the USD amid mixed signals

• Recent hawkish statements by Bank of Japan Governor Kazuo Ueda and Vice President Ryozo Himino, combined with rising inflation pressures in Japan, have increased the risk of an imminent interest rate hike by the Japanese central bank. Markets are pricing in an 80% chance of an interest rate augment this week.
• According to people familiar with the matter, the BoJ will reach its final conclusions after reviewing economic data, markets and the implications of U.S. economic policy. There is a view among officials that U.S. President Donald Trump could shake up markets or change expectations about the global economy.
• On Tuesday, Trump said he intended to impose 25% tariffs on Canada and Mexico, with the target date for tariffs being introduced in early February. Trump’s remarks revive concerns about inflation, which could force the Federal Reserve to maintain a hawkish stance and cause the U.S. dollar to rebound sharply from its two-week low.
• Japanese Finance Minister Katsunobu Kato said on Tuesday that he expected the BoJ to pursue monetary policy appropriately to achieve the 2% inflation target. Kato added that Japan will respond appropriately after analyzing the recent US president’s policies and will closely monitor the impact of US policies on Japan’s global economy.
• Atsushi Mimura, Japan’s vice finance minister for international affairs and top foreign exchange official, said Tuesday that the U.S. economy’s prospects depend on Trump’s macroeconomic policies. It is significant to watch closely whether China’s current export strength continues, Mimura added.
• The US producer price indexes (PPI) and consumer price indexes (CPI) published last week showed signs of waning inflation. This suggests that the Fed cannot rule out the possibility of interest rate cuts by the end of this year, which keeps US Treasury bond yields low and has a negative impact on the dollar.
• There are no significant macroeconomic data affecting the market on Tuesday, neither from Japan nor the US. Moreover, attention continues to focus on the BOJ’s highly anticipated two-day policy meeting, which begins on Thursday, and which will play a key role in determining the near-term trajectory of the Japanese yen.

USD/JPY continues to show some resistance below trend channel support

From a technical perspective, USD/JPY continues to show some resistance below the 155.00 level and has so far managed to defend the support that constitutes the lower boundary of a multi-month ascending channel. Therefore, it is prudent to wait for a convincing break and acceptance below the mentioned support levels before positioning for an extension of the recent decline from the multi-month high. Spot prices could then accelerate the move towards the intermediate support 154.50-154.45 on the way to the round 154.00, mid-153.00 and 153.00 levels.

On the other hand, the Asian session high around 156.25 seems to be an immediate headwind at the moment. Some continued buying beyond the overnight swing high near 156.58-156.60 could allow USD/JPY to reclaim the 157.00 level. The recovery momentum could expand towards the 157.25-157.30 area on the way to the 157.60 area and the round 158.00 level. Sustained strength beyond the latter could set the stage for a move toward retesting the multi-month high near 159.00 that was reached on January 10.