USD/JPY Price Forecast - Dollar to Yen Slips Toward ¥155.75 as BoJ Hawkish Turn and Fed Dovish Shift Narrow Yield Gap

USD/JPY Price Forecast - Dollar to Yen Weakens as Yield Gap Narrows and BoJ Tightens Policy Outlook

The USD/JPY pair trades around ¥155.75, pressured by rising Japanese yields and dovish sentiment surrounding the U.S. dollar. After briefly reclaiming the ¥156.00 mark, the pair reversed course as investors priced in a Bank of Japan (BoJ) rate hike while anticipating a Federal Reserve rate cut in December. The yen’s strength stems from Governor Kazuo Ueda’s remarks signaling that Japan’s economy and price trends align with conditions for higher rates, while U.S. data reinforced expectations of monetary easing.

Fed Expectations Pressure the Dollar as Rate Cut Odds Hit 85%

Traders now assign an 85% probability to a Fed rate cut on December 17, following a sharp cooldown in U.S. Core PCE inflation to 2.4%, its lowest level of 2025. The ADP private payroll report showed the weakest employment growth since 2023, intensifying selling pressure on the greenback. With markets convinced of imminent policy easing, few investors are willing to maintain long dollar positions ahead of the meeting. This shift has dragged the U.S. Dollar Index (DXY) lower, with ripple effects across all major pairs including USD/JPY, EUR/USD, and GBP/USD.

BoJ Policy Reversal Gains Momentum as Inflation Persists

In Japan, the S&P Global Services PMI rose to 53.2, marking ten consecutive months of expansion and sustaining inflation above the 2% target for nineteen months. Rising wages and accelerating input costs have bolstered bets that the BoJ will hike rates this month. Governor Ueda’s acknowledgment that Japan’s growth and inflation forecasts are “gradually being met” further solidified the market’s conviction. As a result, Japanese Government Bond (JGB) yields have climbed, with the 10-year approaching levels not seen since 2008, increasing pressure on carry trades and limiting USD/JPY’s rebound potential.

Market Divergence Intensifies: Fed Eases, BoJ Tightens

The divergence between the BoJ and the Fed is now the dominant market force. While Japan edges toward policy normalization, the Fed moves in the opposite direction. The narrowing U.S.-Japan yield differential — once a major tailwind for USD/JPY — is eroding. Traders note that with each percentage point of narrowing yields, speculative long dollar positions lose appeal. This structural shift favors yen appreciation in the medium term. Short-term rebounds remain possible, but sustained strength above ¥156.50 is unlikely unless the Fed’s tone turns unexpectedly hawkish.

Technical Structure: Key Levels Define Market Risk

Technically, USD/JPY’s support at ¥155.00 remains pivotal. A decisive breakdown below this level could open room toward ¥153.00 and potentially ¥150.00, where stronger buying interest may reemerge. On the upside, resistance lies near ¥156.50 and ¥157.00, which represent prior supply zones tested in late November. The Relative Strength Index (RSI) suggests oversold conditions on shorter timeframes, yet broader momentum remains bearish. Market volume data confirm that rallies are being sold into, aligning with expectations for further yen strength heading into the Fed and BoJ meetings.

Volatility Builds Ahead of Economic Data Storm

Implied volatility in yen pairs has climbed to 9.5%, the highest in over two months, as traders prepare for a dense data schedule — including U.S. ISM Services PMI, ADP Employment, and Japanese wage negotiations. These events are likely to dictate near-term direction. A weaker U.S. labor print could push USD/JPY beneath 155.00, while a surprisingly strong jobs report may produce a temporary squeeze toward 157.00 before sellers reassert control. Japanese authorities are also watching closely for disorderly yen moves, raising the prospect of intervention if volatility spikes above 160.00.

Outlook: Bearish Bias Strengthens with Policy Divergence

The balance of risks now favors yen appreciation. Persistent inflation above the BoJ’s target, stronger wage growth, and tightening domestic conditions contrast sharply with the Fed’s easing path and softening U.S. data. Unless U.S. inflation reaccelerates or BoJ officials delay action, USD/JPY appears biased lower, targeting ¥150.00 in early 2026. Traders are increasingly favoring JPY call options and USD puts to capture downside momentum while limiting exposure. The prevailing sentiment across global desks leans bearish on USD/JPY, with any rally above ¥156.50 likely viewed as a selling opportunity.

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