On Monday (January 6th) during the European session, the US dollar/Japanese yen (USD/JPY) continued to perform strongly, trading around 157.706 and rising about 0.26% for the day. The US dollar and Japanese yen maintained a fluctuating upward trend above 157.00, with market sentiment still leaning towards a strong US dollar. The Japanese yen is under pressure from fluctuations in expectations of interest rate hikes by the Bank of Japan (BoJ) and the expansion of the US Japan interest rate differential. Despite the continuous growth of service industry activity in Japan, the uncertainty of the timing of the Bank of Japan's interest rate hike still dominates the trend of the yen, and the US dollar against the yen has not slowed down its upward trend.

Fundamental analysis

The expectation of the Bank of Japan raising interest rates remains uncertain

Despite the expansion of service industry activities in Japan, the yen remains under pressure, mainly due to market uncertainty regarding expectations of the Bank of Japan raising interest rates. The au Jibun Bank Japan Service Purchasing Managers' Index (PMI) for December was lowered to 50.9, lower than the initial value of 51.4. Although it still reflects the second consecutive month of expansion in the service industry, this data has not significantly changed the market's pessimistic sentiment towards the yen. The Bank of Japan did not provide a clear timetable for interest rate hikes in its statement in December last year, emphasizing the need to remain cautious in the face of increasing global and domestic uncertainty, leading to market volatility in expectations of interest rate hikes.

At present, the market generally expects the Bank of Japan to raise interest rates from 0.25% to 0.50% by the end of the first quarter of 2025, but this expectation does not significantly support the rebound of the yen in the short term. Bank of Japan Governor Kazuo Ueda previously stated that the specific timing of interest rate hikes will depend on the actual development of the economy, prices, and financial markets. Therefore, although data on the rise in Japan's service industry and wages indicate that the Japanese economy has some potential for recovery, the timing of interest rate hikes remains elusive, which has led to a weak performance of the yen against the backdrop of a strong US dollar.

The Governor of the Bank of Japan will pay attention to multiple risks when announcing interest rate hikes

Bank of Japan Governor Kazuo Ueda stated on January 6th that if the Japanese economy continues to improve, the central bank will further raise interest rates. However, he emphasized the need to consider various risk factors when making interest rate hike decisions. Ueda pointed out that although the economy and prices continue to rebound, we still need to be vigilant about external risks such as Trump's tariff rhetoric, as well as whether wage growth can continue to drive consumption and domestic investment. Although the market expects the Bank of Japan to raise interest rates in January or March, Ueda reminds that the timing of the rate hike will depend on the overall trend of the economy, finance, and prices.

The US economy and hawkish signals from the Federal Reserve boost the US dollar

On the other hand, the performance of US economic data and hawkish signals from the Federal Reserve continue to provide support for the US dollar. The Purchasing Managers' Index (PMI) for the US manufacturing industry rose slightly to 49.3 in December, although still below 50, indicating a contraction in manufacturing activity but showing some resilience. The Federal Reserve hinted in its December statement that it will slow down its pace of interest rate cuts in 2025, and San Francisco Fed President Mary Daly pointed out that although inflationary pressures have significantly eased in the past two years, inflation remains above the 2% target, indicating that the Fed may maintain a higher interest rate environment, further driving up bond yields and supporting the US dollar.

The current US Japan interest rate differential continues to widen, and the US dollar is supported by the Federal Reserve's continued hawkish policy, putting further pressure on the Japanese yen to depreciate. Especially with relatively strong economic data in the United States, there is still room for the US dollar to rise against the Japanese yen.

Technical analysis

The technical trend of the US dollar against the Japanese yen continues to be bullish

On a technical level, the trend of the US dollar against the Japanese yen seems to be steadily leaning towards bulls, with the current price around 157.70, not far from the multi month high in December. If the US dollar continues to rise against the Japanese yen, it is expected to face a technical resistance zone of around 158.00, which has been a high point in the past few months. If it breaks through this level, it will open up space for further upward movement. Next, it may test the medium-term resistance of 158.45 and potentially impact the important psychological level of 159.00.

From the daily chart, the momentum indicator of the US dollar against the Japanese yen is strong, and there is no obvious selling pressure. If the price breaks through 159.00, it may continue to challenge the psychological barrier of 160.00, which is consistent with the upper limit of the upward channel formed over the past month, indicating that there is still room for further increase.

On the other hand, if there is a pullback in USD/JPY, the short-term downward support level is expected to be around 157.00, which should provide some support for the downward trend in prices. If we break through this support, we may further explore the psychological support area of 156.65 or even 156.00. If the price continues to fall below 156.00 and breaks through the support level of 155.50, it may cause market sentiment to turn bearish, and the Japanese yen may have a chance to rebound in the short term.

Future Trends and Prospects

From the current market sentiment and technical perspective, the US dollar against the Japanese yen is expected to maintain an upward trend in the short term. The hawkish stance of the Federal Reserve and the uncertainty of the Bank of Japan's interest rate hike continue to support the strength of the US dollar against the Japanese yen, especially against the backdrop of the widening interest rate differential between the US and Japan. Despite the improvement in Japan's service industry data, the market is still concerned about whether the Bank of Japan can raise interest rates as scheduled and the extent of the rate hike, which will determine the future trend of the yen.

In the short term, if the US dollar breaks through the key resistance levels of 158.00 and 159.00 against the Japanese yen, it may further push the price closer to 160.00. On the contrary, if the Japanese yen rebounds and breaks through the lower support level, the market may turn cautious, especially if there are signals of a pullback in the US dollar or policy adjustments by the Bank of Japan. Investors still need to closely monitor the upcoming US economic data and the latest statement from the Bank of Japan, which will have a significant impact on market sentiment and the future trend of the US dollar against the Japanese yen.