USD/JPY Price Forecast - Dollar Extends Slide to 154 as BoJ Hawkish Pivot Drive Yen Toward 150

USD/JPY Price Forecast – Dollar to Yen Gains Ground as Fed Cuts Loom and BoJ Turns Hawkish Ahead of December 19 Meeting

USD/JPY Under Pressure as Fed Prepares 25bp Cut and BoJ Hints at Rate Hike

The USD/JPY pair trades near 154.80, extending its two-week slide as investors reposition ahead of the Federal Reserve’s December 10 meeting and the Bank of Japan’s December 19 policy decision. The pair has fallen over 2.7% in December, its sharpest monthly decline since July, as a shift in yield dynamics narrows the U.S.–Japan rate differential, reducing the dollar’s carry advantage.
Markets assign an 86% probability to a 25-basis-point Fed rate cut, bringing the funds rate to 3.50–3.75%, according to the CME FedWatch Tool. The policy tone—especially the dot plot and Powell’s post-meeting remarks—will determine whether the move is seen as a “hawkish cut” or a dovish pivot. Simultaneously, the BoJ’s Governor Kazuo Ueda signaled the potential end of negative rates, citing wage growth of 2.2% YoY in October and steady core inflation at 2.8%, marking the most hawkish tone from Tokyo since 2007.

Japanese Yields Surge as Policy Normalization Nears, Strengthening the Yen

Japanese Government Bond yields continue to climb, with the 10-year JGB yield rising to 0.98%, its highest level since Q3 2007, and the 2-year yield reaching 0.35%. This shift has reversed the historical correlation between U.S. and Japanese rates: the correlation coefficient between USD/JPY and Japanese 10-year yields now stands at –0.91, indicating that higher Japanese yields are directly strengthening the yen.
Ueda’s hawkish remarks triggered renewed expectations that the BoJ will announce its first policy tightening in nearly two decades during the December 19 meeting. Market pricing via OIS swaps now reflects a 68% chance of a 10-basis-point rate increase, an event that could accelerate yen appreciation below 150.00, particularly if the Fed’s message reinforces a dovish trajectory for 2026.

Fed’s “Dots” to Dictate Dollar Reaction as Powell Nears Exit

While the 25bp cut itself is largely priced in, the focus has shifted to the Fed’s updated dot plot. The September forecast implied two more cuts in 2025 and one in 2026; if Wednesday’s release reveals fewer cuts ahead or a higher long-run neutral rate, it would represent a hawkish cut, pushing USD/JPY back toward 157.90–158.88. Conversely, if the 2026–2027 outlook projects three or more additional cuts, it would solidify a dovish path and likely send the pair down toward 150.00 or even 140.00 in early 2026.
Chair Jerome Powell’s press conference carries extra weight, as it may be one of his final appearances before his term concludes. Markets are preparing for leadership rotation within the FOMC, which could tilt the committee toward a more dovish stance in 2026.

U.S. Data Flow Reinforces Dovish Expectations as Labor Market Softens

The latest macro data strengthens the case for policy easing. The Core PCE Index slowed to 2.8% YoY from 2.9%, signaling progress toward the Fed’s target, while the ADP report showed job creation slowing to 122,000 versus 156,000 in the prior month. The JOLTS job openings fell to 7.20 million, the lowest since 2021, and initial jobless claims rose to 205,000.
Meanwhile, Treasury auctions showed robust demand, with the 10-year yield retreating to 4.12%, down from November’s 4.35%, reflecting investor confidence in a gradual rate-cut path. These dynamics collectively weigh on the dollar, reinforcing bearish pressure on USD/JPY, which remains below the 50-day EMA at 155.70.

Japan’s Economic Outlook Supports a Gradual Policy Shift

Revised Q3 GDP showed a 0.4% quarterly contraction, confirming mild stagnation but not enough to derail the BoJ’s normalization narrative. Household spending fell 3.5% MoM, though wage growth and service inflation offset part of the weakness. Private consumption, which represents 55% of Japan’s GDP, remains stable, and the BoJ sees wage-led inflation as sustainable. The producer price index rose 0.3% MoM, aligning with moderate cost-push dynamics. Together, these data points validate Ueda’s thesis that Japan can tolerate modest rate hikes without derailing growth.

Technical Structure Points to Bearish Continuation for USD/JPY

Technically, USD/JPY is consolidating near 154.80, with a bearish bias forming below the 156.40 pivot. The RSI (14) is neutral at 48, and the MACD has crossed below its signal line, confirming waning bullish momentum. A decisive break below 154.45 would open a path toward 153.00, followed by the psychological 150.00 level.
Upside resistance is concentrated near 157.90, the November swing high, and 158.88, the 2025 peak. A close above these levels would invalidate the current bearish structure, although Japanese Ministry of Finance intervention risks likely cap any move beyond 160.00. The weekly chart’s three-candle evening star pattern still dominates, signaling reversal risk despite intraday fluctuations.

Investor Sentiment and Positioning Turn Bearish

CFTC data shows non-commercial traders cutting long-dollar exposure, with JPY net shorts shrinking by 41% over the last two weeks. Hedge funds now hold the smallest net short yen position since August 2023, anticipating a sustained policy divergence between the BoJ and Fed. The VIX futures correlation with USD/JPY has weakened to –0.32, indicating reduced reliance on U.S. volatility as a directional driver.
Institutional accounts in Tokyo and Singapore have begun reallocating from USD/JPY long carry trades toward EUR/JPY and GBP/JPY, expecting more yield differentiation in European assets. This adjustment underscores a broader structural realignment in yen-based portfolios as the carry trade becomes less favorable.

Market Risk Catalysts: Fed Dots, BoJ Statement, and JGB Auction Results

Three critical events will determine direction over the next two weeks:

1. FOMC meeting and dot plot – a dovish trajectory likely pushes USD/JPY below 152.00.

2. BoJ policy meeting (Dec 19) – confirmation of a rate hike or strong guidance could accelerate yen gains to 148.50–147.00.

3. JGB auctions – strong demand will reinforce yield-driven yen strength, while weak coverage could delay policy action.

Medium-Term Outlook and Trading Scenarios for USD/JPY

The pair’s medium-term structure favors yen appreciation toward 150.00, driven by the convergence of rate expectations and a weaker dollar. If the Fed signals only two cuts in 2026 while the BoJ tightens, USD/JPY could fall to 140.00 by mid-2026. However, if U.S. inflation proves sticky and Japanese growth stalls, a rebound toward 158.00 remains possible in Q1 2026.
Volatility around these policy events is expected to remain elevated, with daily ranges likely exceeding 250 pips during Fed and BoJ press conferences.

Final Market View and Rating for USD/JPY

USD/JPY faces simultaneous headwinds from a dovish Fed and a hawkish BoJ. Technical and macro indicators align toward near-term weakness, with strong potential for a break below 150.00 if policy divergence widens. Structural yen strength, coupled with risk of U.S. disinflation and capital flow reversal, sets the stage for a sustained decline into early 2026.
Verdict: Sell — Target 150.00 short-term, 140.00 medium-term, while upside capped at 158.00 amid BoJ tightening and Fed easing cycle.

That's TradingNEWS