Japanese Yen drifts lower vs recovering USD, ahead of BoJ meeting

The Japanese Yen (JPY) adds to its intraday losses heading into the European session on Wednesday, which, along with a modest US Dollar (USD) uptick, lifts the USD/JPY pair to the 155.30 region in the last hour. Investors remain worried about Japan’s deteriorating fiscal condition on the back of Prime Minister Sanae Takaichi’s massive spending plan. Furthermore, some repositioning trade ahead of a two-day Bank of Japan (BoJ) meeting, starting on Thursday, turns out to be a key factor exerting downward pressure on the JPY.

However, the growing acceptance of an imminent BoJ rate hike on Friday and the cautious market mood could lend support to the JPY. Furthermore, rising bets for more interest rate cuts by the US Federal Reserve (Fed), which marks a significant divergence in comparison to hawkish BoJ expectations, should keep a lid on the attempted USD recovery and help limit losses for the lower-yielding JPY. Hence, it will be prudent to wait for strong follow-through buying before positioning for a further appreciating move for the USD/JPY pair.

Japanese Yen bulls have the upper hand amid bets for an imminent BoJ rate hike

• The Japanese Yen attracts some sellers during the Asian session on Wednesday amid some repositioning ahead of the highly-anticipated two-day Bank of Japan policy meeting, starting on Thursday. The central bank is widely expected to raise interest rates on Friday, and the bets were reaffirmed by the recent shift in rhetoric from BoJ Governor Kazuo Ueda.
• Ueda reiterated last week that the likelihood of the central bank’s baseline economic and price outlook materializing had been gradually increasing. The BoJ is getting closer to attaining its inflation target, Ueda added. This offsets concerns about Japan’s deteriorating fiscal condition, amid Prime Minister Sanae Takaichi’s massive spending plan, and should underpin the JPY.
• The global risk sentiment remains on the defensive amid renewed worries about the health of China’s economy and fears of the AI bubble burst. Moreover, the mixed US Nonfarm Payrolls report released on Tuesday fueled concerns about deteriorating labor market conditions in the world’s largest economy and also tempered investors’ appetite for perceived riskier assets.
• The US Bureau of Labor Statistics (BLS) reported that the economy added 64K jobs in November against consensus estimates for an increase of 50K. In contrast, October payrolls declined by 105K, while September job gains were revised down to 108K from the initial estimate of 119K. Adding to this, the Unemployment Rate climbed to 4.6% from 4.4% in the previous month.
• The data reaffirmed bets for further policy easing by the US Federal Reserve. In fact, traders are pricing in the possibility of two more interest rate cuts by the US central bank in 2026. This, in turn, keeps a lid on the overnight US Dollar recovery from a two-and-a-half-month low and suggests that the path of least resistance for the USD/JPY pair remains to the downside.
• Traders now look forward to speeches from influential FOMC members for more cues about the Fed’s rate-cut path, though the market attention will be on the latest US consumer inflation figures on Thursday. Apart from this, the outcome of a two-day BoJ policy meeting on Friday will play a key role in determining the next leg of a directional move for the USD/JPY pair.

USD/JPY could extend the appreciating move towards reclaiming the 156.00 mark

Against the backdrop of the USD/JPY pair’s recent decline witnessed over the past week or so, the range-bound price action might still be categorized as a bearish consolidation phase. Moreover, oscillators on the daily chart have just started gaining negative traction, validating the near-term negative outlook for spot prices. Hence, weakness back towards retesting the monthly low, around the 154.35-154.30 region, en route to the 154.00 mark, looks like a distinct possibility. A convincing break below the latter will mark a fresh breakdown and pave the way for deeper losses.

On the flip side, the overnight swing high, around the 155.20-155.25 region, nearing the 100-hour Simple Moving Average (SMA), now seems to act as an immediate hurdle. A sustained strength beyond could trigger a bout of a short-covering rally and allow the USD/JPY pair to reclaim the 156.00 mark. The momentum could extend further towards the monthly swing high, around the 157.00 neighborhood, touched last week.