BUZZ-COMMENT-USD/JPY strikes balancing act as Fed approaches

USD/JPY is currently in a delicate balancing act, with the Fed and earnings among the potential catalysts to tip it either way.

USD bulls are leaning into the belief that the dollar will continue to strengthen, driven by the U.S.'s exceptionalism and the potential for U.S. tariffs in the near future. A hawkish stance from Fed Chair Jerome Powell or positive tech earnings Wednesday would further support this outlook.

There are clear upside risks for USD/JPY with volatility tracking spot moves closely and risk reversals aligning across different tenors. However, if U.S. equities react negatively to either Fed comments or earnings reports, the yen could see increased haven demand.

On the other hand, the yen is supported by rising expectations that the Bank of Japan will tighten its policy further, along with anticipated inflows into JGBs later this year. The nomination of Junko Koeda to the BOJ board signals that policy normalization will continue. Tuesday's report that the government pension fund will participate in JGB auctions will likely shift expectations toward Japan-centric allocations.

There are two layers to watch for a possible USD/JPY breakout after the Fed. The 55-day moving at 154.98 offers support ahead of 154.25 cloud top. On the top side,a descending trendline from January high below 156 is resistance ahead of 156.76 Jan. 23 high in focus.

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