Yen range at risk as dollar sinks

USD/JPY bulls might need to reassess as the dollar sinks on Friday following a disappointing U.S. PMI services report and U.S. President Donald Trump's optimistic comments about potentially securing a trade deal with China.

The dollar index is facing its worst 9-day stretch since August as the Federal Reserve meeting next week approaches. The central bank is not expected to alter its policy rates, but inaction could prompt a response from Trump, who expressed a desire on Thursday for the Fed to cut rates.

Shifting USD momentum draws attention to the lower end of the well-established 155-158 USD/JPY range. While downside risks are evident, a broad decline in yen volatility after a widely expected 25bp hike by the Bank of Japan is dampening momentum.

Historically, lower volatility tends to lift yen crosses and buoy USD/JPY as risk sentiment improves. This dynamic may shift if rates are cut outside Japan, making yen carry less attractive.

USD/JPY bulls remain optimistic that improving risk sentiment, U.S. exceptionalism, and Trump’s trade policies will eventually push the pair above 160. However, gains beyond 158 will likely face some resistance from Japanese officials. BOJ Governor Ueda highlighted that the yen’s influence on prices is now more pronounced than in the past and stressed that FX movements should be carefully monitored. Additionally, he was more optimistic about the potential for policy normalization, as the chances of returning to deflation diminish.

With the upside looking less promising, attention turns to nearby support levels, including the 55-day moving average at 154.94 and an ascending trendline from the September low at 154.80. A drop below the December low of 154.45 could prompt some unwinding of long positions.

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