USD/JPY pair approaches 147 ahead of U.S. inflation data

The USD/JPY pair is trading at around 147.23, with traders waiting for U.S. inflation data to break the deadlock. A hotter CPI reading would likely support the dollar and push the pair toward 149, while a softer outcome risks a decisive move lower toward the 146 price level. Despite broad U.S. dollar weakness since early August, USD/JPY has remained resilient, reflecting a tug-of-war between a dovish Federal Reserve and an equally cautious Bank of Japan.

Key takeaways

• USD/JPY has traded in a well-defined range, capped by the current range and supported near 146.77–146.13
  
  
• Japan’s economy expanded 2.2% annualised in Q2, supported by stronger household spending and positive wage growth, but the BoJ remains cautious on rate hikes.
  
  
• Prime Minister Shigeru Ishiba’s resignation triggered short-term volatility but increases the likelihood of delayed BoJ normalisation.
  
  
• The U.S. dollar weakened after August’s soft jobs data, but USD/JPY has been slower to reflect this compared with other pairs.
  
  
• U.S. CPI is the immediate catalyst, with hot data favouring dollar strength and soft data increasing downside pressure.
  
  

USD/JPY rangebound despite dollar weakness

The U.S. dollar has been under pressure since the early-August Nonfarm Payrolls report, which revealed job growth had slumped and unemployment rose to 4.3% - the highest in nearly four years. 

In most FX markets, this weakness translated into meaningful declines. But USD/JPY has remained stubbornly rangebound.

Attempts to break higher have failed at the current range, with sellers quickly rejecting upside momentum. At the same time, buyers have defended the 145–146 zone, producing higher lows that suggest underlying support. The result is a stalemate, with 147 acting as a pivot level while markets wait for a decisive trigger.

Bank of Japan policy could be swayed by political uncertainty

Recent Japanese data has strengthened the case for a BoJ hike. Q2 GDP growth was revised sharply higher to 2.2% annualised from an initial 1.0% estimate, while household spending rose and real wages turned positive for the first time in seven months. 

These developments normally strengthen the argument for policy normalisation.

Yet politics is complicating the outlook. Prime Minister Shigeru Ishiba resigned over the weekend after securing a U.S. trade concession to lower tariffs on Japanese goods from 25% to 15%. His exit followed his party’s election losses earlier in the summer. The leadership change initially spurred safe-haven demand for the yen but also gave the BoJ more cover to stay cautious. With political turnover adding uncertainty, policymakers now have another reason to delay interest rate hikes, capping longer-term yen strength.

Federal Reserve rate cut expectations weigh on the dollar

On the U.S. side, weak jobs data has increased pressure on the Federal Reserve to cut rates. Markets are now pricing an 88.2% chance of a 25 bp cut at the next meeting, with a 11.8% chance of a larger 50 bp move. 

Analysts are also expecting up to three cuts by year-end. This outlook has pushed the dollar to fresh lows not seen since late July.

At the same time, the Fed is under political scrutiny. President Donald Trump has criticised Chair Jerome Powell throughout the year for not cutting rates quickly enough and is considering replacements. That political backdrop, combined with softening labour data, reinforces expectations of aggressive easing.

However, the impact on USD/JPY has been less pronounced than in other dollar pairs, highlighting how yen dynamics - political uncertainty and BoJ dovishness - are offsetting dollar weakness.

Cross-currency signals show selective yen strength

Yen demand has not been uniform across markets. While USD/JPY is holding at 147.23, the yen has weakened against the euro, with EUR/JPY climbing to its highest level in more than a year. This contrast suggests that yen strength is driven more by U.S.-specific factors - particularly Fed policy expectations - than by a broad-based shift in investor appetite for the Japanese currency.

Will the US Inflation report be the decisive event?

The upcoming U.S. CPI release is now the key driver for USD/JPY.

• Hot CPI: A stronger-than-expected print would reduce expectations for aggressive Fed cuts, lift the dollar, and likely push USD/JPY toward 149.15.
• In-line CPI: If inflation meets expectations, USD/JPY could remain stuck in its current range, with 147 continuing to act as the pivot.
• Soft CPI: A weaker print would reinforce market expectations of multiple rate cuts this year, weaken the dollar, and risk breaking support around 146.77–146.13
  

For traders, this sets up a binary outcome where inflation data provides the momentum for the next sustained move.

Market outlook and trading scenarios

At current levels, USD/JPY reflects a balance between two dovish central banks. Short-term yen rallies are fuelled by safe-haven flows and stronger domestic data, but lasting strength requires a clear policy shift from the BoJ - something that remains unlikely in the near term.

The more immediate driver is U.S. inflation. A hot CPI could support dollar recovery and favour tactical long positions with upside toward 149.15. A soft CPI would confirm downside momentum, targeting 146.77. In either case, USD/JPY’s tight range looks unsustainable, and the inflation print is set to determine the breakout. 

USD/JPY technical analysis

At the time of writing, the pair sits at a support level around 146.77, with volume bars making the case for a potential bounce. If a bounce from the support level materialises, bulls could struggle to breach the 149.15 resistance level. Conversely, should we see a further dip, sellers could struggle to breach the 146.13 and 144.25 support floors.

Investment implications

For traders and portfolio managers, USD/JPY’s current setup highlights the importance of event-driven positioning. A hotter CPI could spark a rebound to 149.15, favouring tactical longs. A softer CPI raises the risk of a breakdown to 146.13. Beyond this week, the tug-of-war between a dovish BoJ and an easing Fed suggests continued volatility rather than a sustained one-way trend, making flexible, data-driven strategies essential.