USD/JPY retreated from intraday gains, influenced by the strength of the US Dollar, amid support for a restrictive policy from the Federal Reserve. US inflation expectations are rising due to tariff policies, while Japan’s National CPI showed a cooling trend in February.
The pair experienced selling pressure around 149.60, falling to around 148.60 during North American trading. The US Dollar Index reached near 104.00, reflecting the demand for the Greenback as interest rates are not expected to be cut in the near future.
Federal Reserve Stance And USD Strength
Fed Chairman Jerome Powell noted heightened uncertainty in the US economic outlook, exacerbated by tariff policies. Chicago and New York Fed Presidents confirmed that current interest rate policies remain appropriate.
The mood in Japan was affected by softer CPI data, with the headline index rising by 3.7%, down from January’s 4%. The National CPI excluding Fresh Food climbed to 3%, remaining moderate compared to the previous 3.2% reading.
Despite this, there is confidence among traders that the Bank of Japan may tighten its monetary policy as firms agreed to a 5.4% pay growth this year. The interplay between Japanese and US bond yields, alongside risk sentiment, also exerts influence on the Yen’s valuation.
What we’ve seen with USD/JPY can largely be put down to shifting expectations on either side of the Pacific. The dollar remains firm as the Federal Reserve stands by its current approach, and Powell’s comments suggest they are not rushing to ease conditions. With tariff measures pushing inflation expectations higher, the central bank has little incentive to signal cuts. That view has been reinforced by statements from Chicago’s Goolsbee and New York’s Williams, both of whom indicated no urgent need for policy adjustments. This has kept demand for the dollar high, pushing the DXY towards 104.00 as investors acknowledge that US interest rates will remain elevated for longer.
On the Japanese side, the picture looks different. While the latest inflation figures showed the momentum cooling, expectations for policy tightening in Japan remain intact, largely due to wage pressures. Labour unions have secured a notable 5.4% wage increase, strengthening the case for the Bank of Japan to move away from its ultra-loose stance. However, softer recent inflation data may cause hesitation, particularly if global uncertainties continue to weigh on sentiment.
Impact On Market Sentiment
For derivatives traders tracking the Yen, the mix of US policy stability and Japan’s shifting inflation dynamics offers a complex setup. As long as US rates hold firm, dollar demand should remain healthy, capping downside movement in USD/JPY. But the possibility of a hawkish turn from the Bank of Japan—even if gradual—means traders should be prepared for sudden volatility.
Risk sentiment will play a role as well. Higher yields in the US tend to enhance dollar strength, but if Japanese policymakers adopt a firmer stance, the Yen could see periodic bursts of appreciation. Market participants should keep a close eye on bond yield movements in both economies, as well as any signs of changing rhetoric from Japanese officials regarding monetary tightening.
For the current environment, reactive strategies may perform better than purely directional ones. With US policy steady but Japan’s in flux, conditions are ideal for short-term positioning rather than overcommitting to one side. While the fundamentals point towards prolonged strength in the Greenback, any deviation in expectations—such as a stronger-than-anticipated shift in Japan’s monetary approach—could force rapid repositioning. Given this, traders should remain ready to act, adjusting based on how wage growth, inflation, and central bank commentary continue to unfold.
