USD/JPY Price Forecast - Pair Falls to ¥155 Zone as Fed Easing Meets Aggressive BoJ Hike Expectations

USD/JPY Price Forecast - Pairs After Fed Cut And BoJ Rate-Hike Repricing

Price Snapshot

USD/JPY is trading in the 155.10–155.60 zone after a sharp intraday drop of roughly 0.5%, extending a two-day yen recovery. The pair has slipped from recent highs near 156.90–157.00 and is now testing a dense support band built around 155.50–155.00, as the market reprices the rate differential after the Fed’s latest cut and a growing probability of a Bank of Japan hike next week.

US Labor Weakness Turns Into Direct Headwind For USD/JPY

The immediate trigger for the latest leg lower in USD/JPY is the clear softening in US labor data. Initial Jobless Claims jumped to 236,000 for the week ending December 6, up sharply from 192,000 the prior week and well above the 220,000 consensus. The four-week moving average has climbed to 216,750, confirming a gradual deterioration rather than a one-off spike. Continuing Claims eased to 1.838 million, but they remain elevated relative to earlier in the year, underlining that re-employment is not frictionless. This combination is exactly what the Fed does not want to see after a long tightening cycle and it reinforces the narrative that the labor market is losing momentum. For USD/JPY, softer labor data translates into lower US yields, higher Fed-cut expectations and a weaker dollar leg in the pair.

Federal Reserve Pivot Erodes Yield Support Behind USD/JPY

The Fed has now cut rates by 25 bps, taking the target range down to 3.50%–3.75%, the lowest since 2022 and the third consecutive cut. Powell’s tone was clearly more cautious than markets expected, with limited hawkish dissent inside the FOMC. Fed-funds futures via CME FedWatch are already pricing at least two more cuts in 2026 and around a 77% probability of further easing next year. The dollar index has reacted accordingly, sliding for a second straight session to a two-month low around 98.54. On the rates side, the US 10-year yield has dropped toward 3.9%, while the 10-year JGB sits near 1.1%. The interest-rate gap that supported USD/JPY all through 2024 is narrowing from both sides: the Fed is moving down, the BoJ is preparing to move up. That compresses the carry advantage and structurally undermines the bull case for USD/JPY above the mid-150s.

Bank Of Japan Normalization Becomes A Structural Game-Changer For USD/JPY

On the Japanese side, markets are treating next week’s BoJ meeting as a live hike event. Pricing for a 25-bp move has stabilized above 80%, and several officials have signaled comfort with taking policy off emergency settings. Kazuo Ueda has said the probability that the BoJ’s baseline outlook on growth and inflation materializes has been “gradually increasing.” The Corporate Goods Price Index remains high by historical standards, pointing to persistent upstream inflation pressure. A 25-bp move would lift the policy rate toward roughly 0.75%, the highest since 2008, and would mark a decisive break from the negative-rate era. For USD/JPY, this is not a cosmetic tweak: it directly reduces the rate differential, encourages Japanese capital repatriation at the margin, and supports a stronger yen as a funding currency. The market is now forced to respect the risk that BoJ policy stops being a one-way weakening machine for the yen.

Japan’s Fiscal Expansion And Growth Hit Add Nuance To The Yen Story

The yen is not a one-factor Fed/BoJ spread trade. Japan’s macro mix is messy. Revised GDP figures show the economy shrank 0.6% in Q3 on a quarterly basis and 2.3% year-on-year, the fastest contraction since Q3 2023. Prime Minister Sanae Takaichi’s reflationary agenda leans on heavy fiscal stimulus, with expectations of a supplementary budget in early January. That combination raises legitimate concerns about public finances and long-term debt sustainability, which can cap how far and how fast the yen rallies. At the same time, wage trends and the hope of demand-driven inflation give the BoJ political cover to normalize. For USD/JPY, this means the yen has structural support from policy normalization, but large fiscal packages can generate intermittent spikes higher in the pair when markets price in more JGB issuance and higher term premia.

Dollar Sentiment And Cross-Asset Flows Reinforce Pressure On USD/JPY

The broader dollar tone is negative. The dollar index is down around 0.1% on the day and sitting at two-month lows as markets digest a Fed that is more worried about downside risks to growth and jobs than about inflation. US equities have reacted constructively to the rate cut, with the Dow adding roughly 0.5% and the S&P 500 inching higher, while the Nasdaq underperforms. This mix—softer dollar, modest risk-on, and falling yields—removes a key prop for USD/JPY. The pair used to rally on yield and risk sentiment working together. Now the dollar side is weakening even when global risk appetite is not collapsing, leaving the pair vulnerable on any day when the yen gets additional support from BoJ headlines or domestic data.

BoJ Hike Odds Versus Japan’s Fiscal Risks: Net Impact On USD/JPY

Expectation for a 25-bp BoJ hike “as early as next week” is now the market’s base case. That would push the short-rate ceiling closer to 0.75% and confirm that the BoJ is genuinely in normalization mode. At the same time, markets are wary of Japan’s expanding fiscal footprint under Takaichi, which could pressure long-end JGB yields and partially offset the yen-positive effect of higher short rates. For USD/JPY, this pushes the pair into a tug-of-war: higher JGB yields and BoJ normalization argue for a stronger yen, but larger deficits and debt concerns sometimes act in the opposite direction. Net, with US rates falling faster than Japanese rates are rising, the balance of forces is now skewed to the downside for the pair as long as the Fed remains on a cutting path.

Short-Term Technical Structure: 155.60–155.00 As First Line Of Defense In USD/JPY

Technically, USD/JPY has shifted from a clean uptrend to a corrective phase within that broader bullish structure. Intraday, the pair has already broken below the 156.00 handle and the 100-hour Simple Moving Average, confirming that short-term momentum has flipped lower. The first key support is clustered around 155.60, a level highlighted repeatedly in recent price action as the top of a prior consolidation zone. Price has already begun to retest that area. Just below, a structural breakpoint in the 155.35–155.30 band marks the upper boundary of a recent trading range; this zone is the first true line that separates a shallow pullback from a deeper trend reversal. A clean break and daily close below 155.60 followed by weakness through 155.35–155.30 would open a clear path toward the psychological 155.00 level. Below 155.00, the technical map thickens quickly: there is minor demand near 154.93 and a stronger support and demand pocket in the 154.60–154.53 area, while some longer-term setups watch the 154.40–154.50 region as the lower edge of the current bullish channel. As long as USD/JPY holds above 155.60 on a daily closing basis, the market can still argue for a corrective dip within a broader uptrend. A decisive break beneath 155.00, however, would be a signal that the market has started to price the new Fed–BoJ regime more aggressively.

Upside Recovery Map: What Bulls Must Reclaim On USD/JPY

For the bullish narrative to regain control, USD/JPY needs to do more than simply hold the 155s. The first task is to reclaim and hold 156.00, which now aligns with intraday moving averages and the breakdown zone. Above that, the next objective comes in at 156.60–156.65, an area of prior supply flagged by intraday desks. A sustained break through there would put the recent swing high around 156.90 and the 157.00 neighborhood back in play. If buyers manage to push above 157.00 with conviction, focus will shift to intermediate resistance around 157.13 and then to the 157.45 band. Only a clean move through that zone would re-open the door toward the multi-month peak near 158.00. Beyond 158.00, longer-term bullish projections still reference 159.00 and 159.70 as stretch targets, but those levels now require a very different macro backdrop: a less dovish Fed or a BoJ that blinks and delays normalization. Under the current data and policy mix, rallies toward 156.50–157.00 look more like opportunities for sellers than the start of a fresh impulsive leg higher.

Volatility, Options Positioning And Tactical Plays In USD/JPY

One-month implied volatility in USD/JPY has edged up to around 9.5% after the Fed meeting, reflecting an expectation of wider swings but not a full-blown regime shift. That is consistent with the structure of the spot market: important macro catalysts on the calendar, strong technical levels nearby, but no outright panic. In this environment, directional option strategies make more sense than aggressive leveraged spot trades. A common institutional approach is to use short-dated puts expiring around January 2026 to express a controlled bearish view, capturing potential breaks below 155.00 and 154.60 while capping risk if the BoJ underdelivers or US data unexpectedly rebounds. The logic is simple: the fundamental skew has flipped against the dollar, but the path is noisy and the holiday period is often illiquid. Options absorb that path risk better than naked shorts.

Base Case For USD/JPY Into Q1 2026: Controlled Descent, Not Collapse

Combining policy, macro and technicals, the dominant theme for USD/JPY is a controlled grind lower rather than a crash. On the policy side, the Fed has already taken the first steps down from restrictive territory, with markets comfortable pricing additional cuts. The BoJ, in contrast, is edging toward its first hike in years, with probability for a 25-bp move above 80% and clear messaging that the baseline inflation outlook justifies normalization. Labor data in the US—jobless claims at 236,000 and a rising four-week average—reinforce the case for continued Fed caution. Japan’s GDP contraction of 0.6% quarter-on-quarter and 2.3% year-on-year argues against a runaway yen squeeze, but it does not stop the BoJ from gradually lifting rates as long as wage and price dynamics cooperate. Overlay this with the dollar index at two-month lows near 98.54 and a 10-year yield that has slipped to about 3.9%, versus a JGB yield of roughly 1.1%, and the conclusion is straightforward: the structural support that kept USD/JPY pinned near or above 157 has weakened materially. Technically, as long as spot trades below the 156.60–157.00 band and fails to break 158.00, the path of least resistance is toward repeated tests of 155.60, 155.00 and the 154.60–154.50 demand zone. Only a clear BoJ disappointment or a sharp upside surprise in US data would justify a sustained return to the 158–160 region.

Trading Verdict On USD/JPY: Bearish Bias, Sell Rallies Under 157

Given the current configuration, the stance on USD/JPY is bearish, with a preference to sell strength rather than chase weakness. The shrinking rate differential after the Fed cut to 3.50%–3.75%, the rise in US Initial Jobless Claims to 236,000, the dollar index slipping to 98.54, and an 80%-plus probability of a 25-bp BoJ hike together argue that the multi-month dollar-yen carry trade is entering a unwinding phase, not a fresh expansion. From a trade-location perspective, rallies into the 156.00–156.60 area are attractive zones to re-establish shorts, with invalidation placed above 157.50–158.00 where the macro story would need to be re-examined. On the downside, the first tactical target is the 155.00 handle, followed by the 154.60–154.50 band highlighted by both intraday and swing setups. A decisive break beneath that zone would open room for a deeper mean-reversion leg, but even before that happens, the message from the data is clear: under the current Fed–BoJ trajectory, USD/JPY is a sell on rallies, not a buy on dips.

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