USDJPY enters a pivotal week filled with economic data and central bank meetings. This week, both the Federal Reserve and the Bank of Japan are set to announce rate decisions. In Japan, following stronger-than-expected PMI data on Monday, trade and inflation figures will also be released. Meanwhile, in the US, retail sales, industrial production, GDP, and PCE data might significantly influence financial markets. 

Despite the busy economic calendar, central bank decisions will take center stage. The Federal Reserve is expected to cut rates by another 25 basis points, with markets pricing in a 96% probability of this outcome. A surprise from the Fed is highly unlikely, as its members rarely deviate from market expectations. Instead, the focus of the FOMC meeting will likely be on economic forecasts. The key market reaction will hinge on how many rate cuts the Fed members project for the future. Following several months of strong US data, markets now anticipate fewer cuts in 2025. 

While market participants are looking for cuts from the Fed, they are anticipating hikes from the Bank of Japan. High inflation and relatively strong economic data in Japan have increased the likelihood of another rate hike in the coming months. However, the challenging political landscape complicates this outlook. In the swap markets, the probability of a rate hike at this week’s meeting is priced at just 20%. However, markets expect a hike before the end of the first quarter, most likely during the January meeting. Bank of Japan Governor Ueda might signal an impending hike during this meeting unless the central bank surprises markets with a hike this week. 

(USDJPY 1D Chart) 

USDJPY remains in an uptrend, with an upward wave currently progressing under the pressure of a rising dollar index. However, unless there is a hawkish surprise from the Fed or a dovish surprise from the Bank of Japan, the uptrend is likely to lose momentum in the coming weeks. The pair is consolidating as traders brace for market-moving news. 

The 148.50–150 zone will be the key support level to monitor. A break below this zone could trigger a selloff toward the major trendline originating in 2021. Despite the narrowing gap, the rate differential between the US and Japan remains significant and is likely to persist. Over the medium term, any downside moves still present buying opportunities. 

On the upside, if USDJPY breaks above 155.50 and achieves daily bar closes, a bullish short-term opportunity may emerge. 

This week, the FOMC dot plot and any potential rate surprise from the BOJ will be the main factors to watch for USDJPY’s direction.