On Wednesday, January 22nd, the US dollar/Japanese yen (USD/JPY) was trading at 156.054 in today's latest market quote, up 0.37% for the day. The Japanese yen continues to weaken, moving away from the one month high hit the previous day. The current market trend indicates that risk appetite sentiment still dominates, especially the divergence in policy expectations between the Federal Reserve and the Bank of Japan (BoJ), which further limits the downward space of the yen. As the Bank of Japan policy meeting approaches this week, market participants are paying close attention to the upcoming policy decisions, which may have a significant impact on the trend of the yen.

Comparison between hawkish signals from the Bank of Japan and dovish expectations from the Federal Reserve

The weakness of the Japanese yen is constrained by policy differences between the central banks of the United States and Japan. The dovish stance of the Federal Reserve contrasts sharply with the hawkish attitude of the Bank of Japan. The Federal Reserve is inclined to cut interest rates recently, especially as inflation in the United States gradually eases. The market generally expects the Fed to make two interest rate cuts later this year. The Bank of Japan is expected to raise interest rates at this week's meeting, possibly raising the policy rate from 0.25% to 0.5%. If this interest rate hike decision is implemented, it will be the highest level since the 2008 global financial crisis.

Japanese Prime Minister Shigeru Ishiba is expected to emphasize strong wage growth as a core component of the economic recovery strategy in his policy speech in parliament. This argument has also received support from Japan's largest labor union, the "Union", with union leader Tomoko Yoshida stating that strong wage growth provides strong support for the Bank of Japan to raise interest rates. In addition, the annual labor negotiations between Japan's largest business lobbying group, Keidanren, and labor unions, which began this week, also indicate further wage increases, further strengthening market expectations for the Bank of Japan's interest rate hike.

Risk appetite sentiment continues to suppress demand for Japanese yen

Although the market still has strong expectations for the Bank of Japan to raise interest rates, overall market sentiment remains biased towards risk appetite. The positive sentiment in the stock market further weakened the safe haven demand for the yen, providing support for the US dollar against the yen. In the absence of significant economic data releases, market sentiment remains optimistic, driving the US dollar to rise against the Japanese yen, although the yen may be oversold in the short term.

In addition, recent data on the Producer Price Index (PPI) and Consumer Price Index (CPI) in the United States indicate signs of cooling inflation, which reinforces expectations of further interest rate cuts by the Federal Reserve. The dovish stance of the Federal Reserve contrasts sharply with the hawkish policy of the Bank of Japan, driving further appreciation of the US dollar against the Japanese yen.

Technical aspect: The downward space of the Japanese yen is limited, and key resistance levels are waiting to be broken through

From a technical perspective, the US dollar still shows strong support against the Japanese yen. The currency pair has found support multiple times in the 154.75 area, which is the low point of the past month and continues to operate within a channel that has been continuously rising for over a month. Despite short-term corrections, the oscillating indicators on the daily chart still do not show significant negative momentum, indicating that the yen lacks sufficient selling power in the short term.

The short-term upward resistance level appears in the 156.25 area, which was the high point of volatility earlier this week. If we break through this resistance level, the next target may be the 156.55-156.60 area, representing the high point of this week. If the upward momentum persists, the US dollar/Japanese yen may continue to rise, with a target towards the 157.00 region and further extending towards the 157.25-157.30 region. If it breaks through the resistance level above 157.60, the US dollar against the Japanese yen may retest its multi month high, approaching the 159.00 level, which was touched on January 10th.

On the downside side, 154.75 remains a key support level, followed by the 154.50-154.45 region, which may become barriers to the yen's rebound. If the price continues to fall below the lower boundary of the upward channel, it may accelerate the downward trend and target the 153.00 area. However, whether the Japanese yen experiences such a correction still requires close attention to the policy decisions of the Bank of Japan.