The USD/JPY exchange rate continued its downward trend as the US dollar index (DXY) crashed and as the odds of a potential Federal Reserve and Bank of Japan (BoJ) divergence rose. It dropped to a low of 147.12 on Tuesday, its lowest level since October 2024. It has crashed by over 7.40% from its highest level in December last year. What next for the USDJPY pair after forming a death cross pattern?
Fed and BoJ divergence odds rise
The USD/JPY pair retreated even after Japan’s Statistics agency published weak economic numbers. These data showed that the Japanese economy rose by 0.6% in the fourth quarter after growing by 0.3% in Q2. This growth led to an annualized rate of 2.2%, a big increase from the previous 1.2%.
More data showed that Japan’s household spending contracted by 4.5% in January after growing by 2.3% a month earlier. The decline led to an annualized growth rate of 0.8%.
Another report revealed that private consumption was unchanged in Q4, while the money supply eased a bit.
While most of these numbers were lower than estimates, there are still chances that the Bank of Japan (BoJ) will likely hike interest rates later this year.
That’s because Japan’s inflation has remained at an elevated level in the past few months. The most recent data showed that the headline consumer inflation rose to 4.0% in January from 3.6% in the previous month.
Japan’s inflation is higher than the United States, which rose by 3.0% in January. As such, the BoJ hopes that inflation will start falling because of its interest rate hikes.
However, there is also a likelihood that the BoJ will maintain a wait-and-see approach on interest rates. This view will be necessary as the country waits for the tariffs the US will implement on the country.
US inflation data ahead
The USD/JPY exchange rate has crashed because of the ongoing US dollar index crash as it moved from $110 earlier this year to $103.5 today.
This crash occurred because the market changed its view about the Federal Reserve and its next actions. In December, the Fed hinted that it would slash interest rates two times as inflation remained high.
Fed officials like Jerome Powell and Mary Daly have repeatedly said that the bank will not be in a hurry to cut interest rates.
The bond market, however, signals that the bank may start cutting rates in May as the economy stares to a recession. Recent data shows that the 10-year yield dropped to 4.182%, while the 30-year and 2-year fell to 4.52% and 3.875%.
The next key USD/JPY news will be the upcoming US consumer inflation data on Wednesday. While these numbers are important, their impact on the USD will be limited because the figures will not include the recently announced tariffs.
USD/JPY technical analysis
USDJPY chart by TradingView
The daily chart shows that the USDJPY exchange rate has been in a strong downward trend in the past few months. It recently crashed below the key support at 148.61, its lowest swing on December 3, and the neckline of a double-top pattern.
The pair has formed a death cross pattern as the 50-day and 200-day Weighted Moving Averages (WMA) have flipped each other. Also, the MACD and the Relative Strength Index (RSI) have continued falling.
Therefore, the path of the least resistance is downwards, with the next support level to watch being the psychological point at 145. A move above the resistance at 150 will invalidate the bearish view.
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