USD/JPY rebounds ahead of Fed decision, BoJ tightening prospects limit upside

• The US Dollar stages a partial recovery ahead of the Federal Reserve’s monetary policy decision.
• Remarks from the US President in favor of a weaker US Dollar continue to weigh on sentiment.
• The Japanese Yen remains supported by expectations of monetary tightening in Japan.

USD/JPY trades around 153.60 on Wednesday at the time of writing, up 0.80% on the day, as the US Dollar (USD) attempts to stabilize after hitting a four-year low earlier in the week. The rebound comes as investors remain cautious ahead of the Federal Reserve (Fed) policy decision expected later in the day.

The US Dollar came under heavy pressure on Tuesday following comments from US President Donald Trump, who said that a weaker US Dollar was “a good thing” and that the currency was simply seeking its own equilibrium level. These remarks reinforced concerns about political tolerance for a softer currency, adding to the pressure on the Greenback, which is already weighed down by expectations of future rate cuts.

Markets widely expect the Fed to keep interest rates unchanged in the 3.50%-3.75% range. Money markets assign a chance close to 95% to a hold, following three consecutive 25-basis-point cuts delivered last year. The focus will be firmly on Fed Chair Jerome Powell’s press conference, as his remarks are expected to provide guidance on the future path of interest rates. Several major banks believe the central bank will emphasize a wait-and-see approach, even as markets continue to price in two rate cuts later this year.

Since the last Fed meeting, US macroeconomic data have broadly supported the view that the central bank can afford to remain patient. Inflation is easing only gradually, while labor market conditions remain relatively resilient, reducing the urgency for further monetary easing. However, any signal of a prolonged pause could provide additional support to the US Dollar.

On the Japanese side, the Japanese Yen (JPY) continues to draw structural support from the evolving monetary policy outlook. Minutes from the Bank of Japan’s (BoJ) December meeting showed that policymakers are increasingly confident in the sustainability of wage growth and underlying inflation, justifying a gradual continuation of monetary tightening. This backdrop helps limit Japanese Yen losses, despite persistent concerns over Japan’s fiscal position and political uncertainty ahead of the snap election scheduled for February 8.

Concerns surrounding government spending plans and tax cuts in Japan continue to weigh on the domestic currency, alongside a generally positive risk environment. These factors help underpin USD/JPY in the near term, although the growing divergence between a more hawkish Bank of Japan and a Federal Reserve that may lean toward rate cuts could, over the medium term, restore some appeal to the Japanese Yen.