The USDJPY initially dropped following the Fed’s decision but then surged as the market realised the Fed’s stance was more hawkish than anticipated. The FOMC projected two more rate cuts for 2025, contrary to market expectations of more aggressive cuts. For 2026, only one cut was projected, less than the three anticipated before the decision. Fed Chair Powell’s emphasis on the labour market reflects recent soft economic data.
The yen is primarily influenced by dovish Fed expectations, with no major changes in its fundamentals. The BoJ is expected to maintain its current policies, with the market focused on any forward guidance changes. Strong data could lead to a more hawkish readjustment in interest rate forecasts, affecting the USD positively, while weak data could continue to hamper it.
Technical Analysis
Technically, on the daily chart, USDJPY dropped below the range to a trendline around 145.60, sparking buyer interest for a rally towards 151.00. Sellers seek a break below this trendline for a fall to 143.00. The 4-hour chart shows a minor downward trendline driving bearish sentiment, with sellers eyeing a breakout, while buyers target a breach upwards. The 1-hour chart suggests buying interest at minor support of 146.70 and selling pressure for a potential downward break. Upcoming catalysts include US Jobless Claims, Japanese CPI, and the BoJ policy decision.
We saw the market initially misunderstand the Federal Reserve’s message yesterday, causing a dip in USDJPY before a sharp reversal higher. The Fed’s updated projections were more hawkish than anticipated, with the dot plot now showing a narrow majority favoring just two more rate cuts in 2025. This contrasts with market pricing before the meeting, which according to the CME FedWatch tool, had implied a nearly 70% probability of three or more cuts.
Looking forward, everything now hinges on incoming US economic data. While Chairman Powell acknowledged the last two soft Non-Farm Payroll reports, which we saw come in around 150,000 for August 2025, the underlying inflation remains a concern. With the last Core PCE reading for July 2025 holding firm at 3.8%, strong economic figures in the coming weeks will likely reinforce the Fed’s cautious stance and strengthen the dollar.
Japanese Economic Outlook
On the Japanese side, fundamentals remain largely unchanged ahead of the Bank of Japan’s decision tomorrow, September 19th. We expect policymakers to maintain their current stance, especially with the upcoming national CPI data forecast to be around 2.5%, a level that doesn’t force immediate action. The BoJ’s slow pace of policy normalization, which began back in 2024, suggests they will not be a primary driver for the yen right now.
From a technical standpoint, the USDJPY pair found strong support at the major trendline around the 145.60 level. For derivatives traders, this presents a clear opportunity to consider buying call options with strikes aiming for the 151.00 handle, betting that the Fed’s hawkish tilt will dominate. Implied volatility has likely settled after the Fed event, potentially offering better pricing for such positions.
However, risk management is crucial, as a decisive break below that 145.60 trendline would invalidate the bullish outlook. Traders could use put options with strikes below 145.00 as a hedge or to position for a drop towards the 143.00 level. This bearish scenario would become more probable if upcoming US Jobless Claims or other key data show significant weakness in the American economy.
