Japanese Yen trims a part of modest gains against USD; bullish potential seems intact

The Japanese Yen struggles to build on the Asian session gains amid reduced BoJ rate hike bets.

The prevalent risk-off environment, amid recession fears, should support the safe-haven JPY.

Aggressive Fed rate cut bets keep the US bond yields depressed, capping the USD and USD/JPY.

The Japanese Yen (JPY) kicks off the new week on a positive note as US President Donald Trump's sweeping reciprocal tariffs raise the risk of a global economic slowdown and continue to underpin traditional safe-haven assets. Meanwhile, concerns that harsher US reciprocal tariffs could negatively impact Japan's economy forced investors to scale back their bets that the Bank of Japan (BoJ) would raise the policy rate at a faster pace. This, in turn, acts as a headwind for the JPY and assists the USD/JPY pair to reverse an Asian session dip back closer to a six-month low – levels below the 145.00 psychological mark – touched on Friday.

However, signs of broadening inflation in Japan keep the door open for further BoJ interest rate hikes in 2025. Apart from this, persistent geopolitical tensions should limit any meaningful depreciating move for the JPY. The US Dollar (USD), on the other hand, struggles to capitalize on Friday's positive move amid bets for more aggressive policy easing by the Federal Reserve (Fed), fueled by concerns about a tariffs-driven US economic slowdown. This, along with a further steep decline in the US Treasury bond yields, should act as a tailwind for the lower-yielding JPY and cap any meaningful recovery move for the USD/JPY pair.

Japanese Yen struggles to lure buyers as traders scale back bets for an early BoJ interest rate hike

• Asian stock markets and US equity futures tumbled at the start of a new week amid growing concerns about a widening global trade war and the mounting risk of recession. US President Donald Trump late last Wednesday imposed a 10% baseline tariff on all imports and higher duties on some of the country's biggest trading partners. In response, the European Union is all set to join China and Canada in imposing retaliatory tariffs.

• Investors scaled back their bets for early interest rate hikes by the Bank of Japan amid concerns that harsher-than-expected US tariffs could negatively impact Japan's economy. Japan's Chief Cabinet Secretary Yoshimasa Hayashi said this Monday that US tariffs are expected to have a big impact on Japan-US economic relations. This, in turn, fails to assist the safe-haven Japanese Yen to capitalize on its modest Asian session gains.

• Meanwhile, Japan's Prime Minister Shigeru Ishiba said late Sunday that the country would continue pressing the US to lower tariffs on Japanese goods, but acknowledged that progress was unlikely to come overnight. Ishiba added that he is aiming to have a call with Trump this week and also emphasized the importance of domestic support measures in the meantime. This, however, does little to impress the JPY bulls.

• The US Dollar preserves Friday's modest recovery gains led by the stronger-than-anticipated US Nonfarm Payrolls (NFP) report and hawkish comments from Federal Reserve Chair Jerome Powell. The US Bureau of Labor Statistics (BLS) reported that the economy added 228,000 new jobs in March as compared to the 135,000 market expectations and the previous month's downwardly revised reading of 117,000.

• Powell acknowledged that Trump's tariffs could have a stronger-than-anticipated inflationary and economic impact, though policy changes remain on hold for now. Powell stated that inflation is closer to target but still slightly elevated and that the Fed’s job is to avoid temporary price hikes turning into persistent inflation. The Fed is monitoring uncertainty from the Trump administration's trade policies, Powell added further.

• Market participants, however, seem convinced that the US central bank will resume its rate-cutting cycle at the June policy meeting and lower borrowing costs at least four times by the end of this year to bail out the economy. This, along with the anti-risk flow, drags the yield on the benchmark 10-year US government bond further below the 4.0% mark and might hold back the USD bulls from placing aggressive bets.

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USD/JPY is likely to attract fresh sellers at higher levels and remain capped near the 147.70 hurdle

From a technical perspective, last week's breakdown and acceptance below the 61.8% Fibonacci retracement level of the September-March positive move was seen as a fresh trigger for the USD/JPY bears. Moreover, oscillators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for spot prices remains to the downside. Hence, any subsequent recovery beyond the 147.00 mark (61.8% Fibo. level) might be seen as a selling opportunity and remain capped near the 147.70 region. This is followed by the 148.00 round figure, which if cleared decisively might trigger a near-term short-covering rally.

On the flip side, the 146.00 mark, followed by the 145.45 region, the 145.00 psychological mark Asian session low, around the 144.80 region, and a multi-month trough, around the 144.55 region touched on Friday, could act as immediate support levels. Some follow-through selling below the latter will reaffirm the negative bias and make the USD/JPY pair vulnerable to accelerate the downfall further toward the 144.00 round figure.