Rate differentials still steer USD/JPY, but trade war fears are adding another layer of risk. With Powell, CPI, and key auctions ahead, is more downside on the cards?
By : David Scutt, Market Analyst
- Yield spreads still drive USD/JPY, with strong 10 and 30-year correlations.
- US CPI is key—hotter print could cut Fed rate bets
- Powell testifies twice, with Wednesday likely more crucial.
- US bond auctions (10 and 30-year) could move USD/JPY
- Trade war risks may flatten yield curves and pressure USD/JPY
Summary
Interest rate differentials remain the dominant driver of USD/JPY, keeping US and Japanese inflation data, Treasury auctions, and two appearances from Fed Chair Jerome Powell firmly in focus this week. The wildcard? A potential escalation in the trade war, with US President Donald Trump expected to announce new reciprocal tariffs in the coming days.
Despite the inflationary risk posed by tariffs, price action and momentum suggest the bias for USD/JPY remains lower for now.
Yield Differentials Strengthen Grip
Longer-term interest rate differentials between the US and Japan continue to steer USD/JPY, as reflected in correlation coefficient scores over the past month (see chart below)
Source: TradingView
The correlation between USD/JPY and 10-year US-Japan bond yield differentials shown in black sits at 0.92, underscoring their tight relationship. A similar pattern holds for 30-year spreads in blue, also at 0.92. Two-year spreads in red, which are more sensitive to central bank outlooks, show a weaker correlation, suggesting tariffs may not be as strong an influence on USD/JPY from a rate differential perspective.
Evaluating Event Risk
With that in mind, let’s turn to the key event risks ahead. The table below outlines scheduled economic data releases for the US and Japan. Events marked in red are the primary market movers, while those in yellow are secondary.
Source: Refinitiv
The standout release is US core CPI, with markets expecting a 0.3% increase in January. A stronger reading would challenge the Fed’s 2% inflation mandate, likely reducing rate cut expectations and tilting USD/JPY higher. A softer print would have the opposite effect.
Beyond CPI, US retail sales, producer price inflation, and Japan’s producer price inflation also warrant attention.
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Powell’s testimony to Congress on Tuesday and Wednesday adds another layer of risk, especially with CPI data dropping on Wednesday. His second appearance could therefore prove more consequential.
Source: TradingView
While less scrutinized than economic data and central bank events, US bond auctions remain a key input for USD/JPY traders given their impact on yield differentials. This week sees auctions of three, 10, and 30-year Treasuries, with the latter two—scheduled for Wednesday and Thursday—likely to be the most influential.
Source: Refinitiv
Trade War, Tariffs May Add to Downside Risks
Beyond monetary policy, traders must also assess the risk of an escalating US-led trade war. Key questions include the scope and severity of tariffs, potential retaliation, and implications for interest rates.
Historically, rising trade barriers lift near-term inflation while slowing growth over time—often flattening yield curves. Given USD/JPY’s strong relationship with longer-date yield spreads, a worsening trade conflict could reinforce downside risks, particularly if it triggers a broader unwind of carry trades.
USD/JPY Technical Analysis: Bears Gain Ascendency
Source: TradingView
Technically, USD/JPY remains vulnerable after last week’s wedge break. The pair sliced through 153.30, the 50-week moving average, the 200-day moving average, and the key 151.95 level with ease—reinforcing the case for further downside near term.
The downside move stalled around 151.30 on Friday, a level that acted as both support and resistance in late 2024. But despite strong US payrolls, hot wage growth, and fresh tariff headlines, USD/JPY barely budged from that level into the close—a telling sign.
If 151.30 gives way, there’s little technical support until 148.65 (December swing low), followed by 147.20 and the broader uptrend from January 2021 near 141.50. Above, sellers may be lurking at the 50-week moving average and 153.30. MACD and RSI (14) remain bearish, favouring selling rallies and downside breaks.
– Written by David Scutt
Follow David on Twitter @scutty
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