Interest rate differentials haven't collapsed, inflation hasn't been finalized: USD/JPY's warm market
2025-09-24 19:57:32
On Wednesday (September 24th), the USD/JPY rebounded, trading around 148.50 during the European session. This was driven by a temporary strengthening of the US dollar: the US dollar index approached 97.80, ending a two-day pullback. Federal Reserve Chairman Powell emphasized the need for caution regarding further interest rate cuts, dampening market expectations for rapid easing. In Japan, the preliminary manufacturing PMI for September fell to 48.4 (from 49.7 in August), remaining in contractionary territory, while the services PMI edged up to 53.0, showing limited marginal improvement. Macroeconomic and policy cues intertwined around 148, pushing the exchange rate into a delicate phase of "strong but constrained."
This week, Powell addressed a dilemma: the coexistence of upward inflation risks and a weakening labor market. Easing too quickly would undermine progress, while easing too slowly would drag down growth. His comments echoed the cautious tone of several FOMC members, including the heads of the St. Louis, Atlanta, and Cleveland Fed banks, pushing back market expectations for rapid rate cuts in recent months. This is consistent with the Fed's 25 basis point cut on September 17th: the roadmap is more like a slow brake than a sharp turn. Institutions expect two more 25 basis point rate cuts this year, with the medium-term goal of gradually returning the policy rate from its upper limit of 4.25% to a neutral level near 3%. However, the structure of inflation is still confounded by one-off factors such as tariff adjustments, and the Fed needs to guard against a second wave of inflation caused by an overly rapid pace of easing. Against this backdrop, the US dollar's interest rate advantage has not immediately collapsed, exerting temporary pressure on the Japanese yen and pushing the US dollar index back to around 97.80.
In Japan, September's manufacturing PMI of 48.4 marked the weakest reading since March, indicating continued pressure on external demand and the manufacturing supply chain. The services PMI, at 53.0, maintained expansion, but with limited momentum. Last week, the Bank of Japan held its policy stance steady, with relatively hawkish dissent emerging within its board, suggesting that a withdrawal from ultra-loose monetary policy remains on the horizon, though the pace and timing will be more dictated by data and the political calendar. If the LDP leadership election on October 4th turns dovish, the incoming leadership could delay a rate hike; however, the speculation surrounding a 25bp hike in October has not been fully dispelled. These policy divergences have created a misalignment between the Bank of Japan's "slow withdrawal" and the Federal Reserve's "slow easing." While short-term interest rate differentials still favor the US dollar, a convergence in the medium term is also brewing, limiting the potential for unilateral appreciation of the US dollar.
Looking ahead, US durable goods orders, PCE inflation (Thursday and Friday), and new home sales (tonight) will calibrate the relative strength of "sticky inflation" and slowing growth. In Japan, Tokyo's CPI (Friday) will serve as a key "forward anchor" for monitoring the Bank of Japan's next moves. If US inflation stickiness rises and growth doesn't significantly cool, interest rate differentials and risk aversion will support the US dollar. Conversely, if core inflation declines significantly, coupled with a repricing of the Bank of Japan's rate hike risks, USD/JPY will face resistance and enter a deeper pullback.
On the daily chart, the Bollinger Bands' middle line is 147.546, the upper band is 148.583, and the lower band is 146.508. The latest price of 148.421 is approaching the upper band, indicating that short-term momentum is dominant, but upward momentum is beginning to be constrained by the band. The previous swing high of 149.134 and the earlier swing high of 150.914 form a static resistance ladder, while the recent lows of 146.211/145.480 and the earlier low of 145.851 provide layers of support.
On the MACD side, the DIFF 0.101 crossed above the DEA 0.027, and the histogram 0.148 turned positive and expanded moderately, indicating that the momentum has just entered the positive zone but is still in a "light bullish" position. The price needs to effectively stabilize above the upper Bollinger band and the histogram needs to further expand before it can open the upward gate of 149.134-150.914. The RSI (14) is at 56.919, still far from the overbought zone, indicating that the upward trend is not overdrawn, but it also suggests that the market is more likely to evolve into a "slow climb + frequent retracements" rather than a "straight line breakthrough."
Comprehensive Interpretation: 147.546 (the middle Bollinger band) is the current trend watershed. Above this level, the upward channel slope will be maintained. Below this level, if the daily chart breaks down and the MACD drops back below zero, the structure will degenerate into a range-bound pattern, potentially reverting to the lower band at 146.508. Key short-term observation points lie between 148.583 and 149.134. If the band expands and the price closes above the upper band, it will signal a potential volume breakout. Repeated upper shadows indicate a false breakout followed by a pullback to test the middle band.
Since the beginning of this week, the conflict between the fundamental US dollar trend of "slow easing" and the weak consensus on a "strong dollar trade" has prevented a significant increase in foreign exchange volatility, more resembling a "Bollinger Band squeeze" before a risk event: prices are nearing the upper band, but sentiment is not yet extreme. The 150 mark above is likely to attract a lot of protective bullish signals, while the 147.50 mark below may see some defensive activity from premium sellers.
The core drivers of emotions are:
1) The order of PCE and Tokyo CPI is finalized - if both are biased towards "inflation is not weak", the sentiment will tilt towards "buying on dips";
2) The oscillation of Bank of Japan rate hike bets – the political calendar may cause the probability of a 25bp hike in October to fluctuate in the news flow, which will directly affect the safe-haven premium of the yen;
3) Misalignment between global interest rate differentials and risk appetite – European interest rate differential volatility and policy uncertainty provide secondary safe-haven support for the US dollar in the near term, but are not enough to change the broader narrative of “slow Fed rate cuts.”
In general, the market is rationally optimistic and is "cautious in going long on the US dollar and not chasing highs", and there is no consensus on the belief in a unilateral rise in the exchange rate.
Fundamentals: "Slow braking" at both ends, interest rate differentials and growth expectations are competing
This week, Powell addressed a dilemma: the coexistence of upward inflation risks and a weakening labor market. Easing too quickly would undermine progress, while easing too slowly would drag down growth. His comments echoed the cautious tone of several FOMC members, including the heads of the St. Louis, Atlanta, and Cleveland Fed banks, pushing back market expectations for rapid rate cuts in recent months. This is consistent with the Fed's 25 basis point cut on September 17th: the roadmap is more like a slow brake than a sharp turn. Institutions expect two more 25 basis point rate cuts this year, with the medium-term goal of gradually returning the policy rate from its upper limit of 4.25% to a neutral level near 3%. However, the structure of inflation is still confounded by one-off factors such as tariff adjustments, and the Fed needs to guard against a second wave of inflation caused by an overly rapid pace of easing. Against this backdrop, the US dollar's interest rate advantage has not immediately collapsed, exerting temporary pressure on the Japanese yen and pushing the US dollar index back to around 97.80.
In Japan, September's manufacturing PMI of 48.4 marked the weakest reading since March, indicating continued pressure on external demand and the manufacturing supply chain. The services PMI, at 53.0, maintained expansion, but with limited momentum. Last week, the Bank of Japan held its policy stance steady, with relatively hawkish dissent emerging within its board, suggesting that a withdrawal from ultra-loose monetary policy remains on the horizon, though the pace and timing will be more dictated by data and the political calendar. If the LDP leadership election on October 4th turns dovish, the incoming leadership could delay a rate hike; however, the speculation surrounding a 25bp hike in October has not been fully dispelled. These policy divergences have created a misalignment between the Bank of Japan's "slow withdrawal" and the Federal Reserve's "slow easing." While short-term interest rate differentials still favor the US dollar, a convergence in the medium term is also brewing, limiting the potential for unilateral appreciation of the US dollar.
Looking ahead, US durable goods orders, PCE inflation (Thursday and Friday), and new home sales (tonight) will calibrate the relative strength of "sticky inflation" and slowing growth. In Japan, Tokyo's CPI (Friday) will serve as a key "forward anchor" for monitoring the Bank of Japan's next moves. If US inflation stickiness rises and growth doesn't significantly cool, interest rate differentials and risk aversion will support the US dollar. Conversely, if core inflation declines significantly, coupled with a repricing of the Bank of Japan's rate hike risks, USD/JPY will face resistance and enter a deeper pullback.
Technical aspects:
On the daily chart, the Bollinger Bands' middle line is 147.546, the upper band is 148.583, and the lower band is 146.508. The latest price of 148.421 is approaching the upper band, indicating that short-term momentum is dominant, but upward momentum is beginning to be constrained by the band. The previous swing high of 149.134 and the earlier swing high of 150.914 form a static resistance ladder, while the recent lows of 146.211/145.480 and the earlier low of 145.851 provide layers of support.
On the MACD side, the DIFF 0.101 crossed above the DEA 0.027, and the histogram 0.148 turned positive and expanded moderately, indicating that the momentum has just entered the positive zone but is still in a "light bullish" position. The price needs to effectively stabilize above the upper Bollinger band and the histogram needs to further expand before it can open the upward gate of 149.134-150.914. The RSI (14) is at 56.919, still far from the overbought zone, indicating that the upward trend is not overdrawn, but it also suggests that the market is more likely to evolve into a "slow climb + frequent retracements" rather than a "straight line breakthrough."
Comprehensive Interpretation: 147.546 (the middle Bollinger band) is the current trend watershed. Above this level, the upward channel slope will be maintained. Below this level, if the daily chart breaks down and the MACD drops back below zero, the structure will degenerate into a range-bound pattern, potentially reverting to the lower band at 146.508. Key short-term observation points lie between 148.583 and 149.134. If the band expands and the price closes above the upper band, it will signal a potential volume breakout. Repeated upper shadows indicate a false breakout followed by a pullback to test the middle band.
Market sentiment observation:
Since the beginning of this week, the conflict between the fundamental US dollar trend of "slow easing" and the weak consensus on a "strong dollar trade" has prevented a significant increase in foreign exchange volatility, more resembling a "Bollinger Band squeeze" before a risk event: prices are nearing the upper band, but sentiment is not yet extreme. The 150 mark above is likely to attract a lot of protective bullish signals, while the 147.50 mark below may see some defensive activity from premium sellers.
The core drivers of emotions are:
1) The order of PCE and Tokyo CPI is finalized - if both are biased towards "inflation is not weak", the sentiment will tilt towards "buying on dips";
2) The oscillation of Bank of Japan rate hike bets – the political calendar may cause the probability of a 25bp hike in October to fluctuate in the news flow, which will directly affect the safe-haven premium of the yen;
3) Misalignment between global interest rate differentials and risk appetite – European interest rate differential volatility and policy uncertainty provide secondary safe-haven support for the US dollar in the near term, but are not enough to change the broader narrative of “slow Fed rate cuts.”
In general, the market is rationally optimistic and is "cautious in going long on the US dollar and not chasing highs", and there is no consensus on the belief in a unilateral rise in the exchange rate.
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