Volatility Looms as USD/JPY Trades into Macro Crossfire

Forex

Economic

Summary:

This week is shaping up to be a wild ride for USD/JPY traders with major U.S. economic data, rate decisions from the Fed and Bank of Japan, trade talks, tech earnings, and an update on U.S. borrowing needs fuelling volatility. Ahead of this convergence of event risk, price and momentum signals favour further USD/JPY upside. Whether that plays out is another story, especially given how quickly the macro landscape can shift in 2025.

USD/JPY Back in Step With Long-End Yields

Before diving into key events, it’s useful to look at the broader forces influencing USD/JPY in recent weeks. The first chart shows correlation coefficient scores between USD/JPY and a range of indicators across rates, volatility and FX over the past fortnight.

Volatility Looms as USD/JPY Trades into Macro Crossfire_1

Source: TradingView

What stands out is a strengthening correlation between USD/JPY and U.S. 10-year Treasury yields, reverting to the historical relationship seen before the latest escalation in U.S. trade tensions. While a 0.79 correlation isn’t the strongest, it’s notably firmer than with short-dated yields or U.S.-Japan yield spreads. The fact it’s been sitting around this level for a while suggests upcoming developments that influence U.S. rate or fiscal expectations could have a major bearing on the pair this week.

USD/JPY has also shown a mild positive correlation with VIX futures, reinforcing its role as a funding currency in carry trades. A 0.92 correlation with USD/CHF further supports this, pointing to risk appetite as another key influence this week.

U.S.–EU Trade Talks: Deal Priced In, But Risks Skewed Lower

While we’ll touch on the Fed and BoJ shortly, they’re not the main risks for USD/JPY. Instead, it’s events that could alter the rate outlooks for both nations that carry more weight, putting economic data and U.S.-E.U. trade talks front and centre.

On trade, I won’t go into detail beyond noting that talks are scheduled in Scotland between Trump and E.U. President Ursula von der Leyen, and markets are looking for a deal. That means if no agreement is reached, USD/JPY could fall more than it would rise on confirmation. The risks are asymmetric.

U.S. Data Deluge: NFP, GDP, and Core PCE All in Play

Volatility Looms as USD/JPY Trades into Macro Crossfire_2

Source: LSEG

The economic calendar alone is enough to get the pulse racing. The key event comes late in the week with U.S. non-farm payrolls. The recent pattern has been upside surprises alongside downward revisions to prior data. With jobless claims falling, that may continue. While the payrolls print grabs the headlines, it’s the unemployment rate that carries more weight for the Fed. If the two diverge, markets will likely focus on the unemployment read eventually.Before then, JOLTS job openings, ADP employment, and jobless claims will help shape expectations. Non-labour data including U.S. Q2 GDP, core PCE, income and consumption, and the ISM manufacturing PMI are also due. All could dominate in a normal week, which shows how critical the next five days are.

Japan’s calendar is quieter, allowing some breathing space during Asian trade. The U.S. Treasury will auction new two, five and seven-year notes early in the week and release its Q3 borrowing update. Treasury previously flagged $554 billion in borrowing. That figure will be updated Monday, with issuance details due Wednesday.

Volatility Looms as USD/JPY Trades into Macro Crossfire_3

Source: LSEG

Given the link between Treasury yields and USD/JPY, both could trigger volatility, especially if the borrowing need exceeds prior guidance or if Treasury opts to extend maturities. With long-end yields still elevated, that risk looks low for now.

Fed, BOJ Preview

Volatility Looms as USD/JPY Trades into Macro Crossfire_4

Source: TradingView (U.S. ET)

Turning to the Fed and BoJ, neither are expected to change rates. The Fed funds rate is priced to remain at 4.25-50% with 96% probability, according to implied swaps pricing. The BoJ is seen holding steady at 0.5% with similar odds. With so little priced, volatility will be driven by guidance in the absence of a shock decision.

Volatility Looms as USD/JPY Trades into Macro Crossfire_5

Source: Bloomberg

With no updated forecasts from the Fed, it’ll come down to the tone of the July statement, the vote split, and Chair Powell’s press conference. The tone likely won’t shift much given uncertainty, but the vote could be telling. Governor Waller is expected to dissent in favour of a cut. If others join him, markets may price in earlier cuts, potentially weighing on USD/JPY.

The BoJ will release new GDP and inflation forecasts, offering a glimpse into how it views the impact of higher trade barriers. An upgrade to its FY2025 inflation forecast looks likely thanks to sticky food prices driven by rising rice costs. Whether last week’s U.S. trade deal alters its 2026 and 2027 views is unclear. Three months ago, the BoJ saw CPI ex-fresh food undershooting its 2 percent target, citing concerns over U.S. tariffs. If it sticks with that view, it could weaken the yen and lift USD/JPY. But if it sees inflation staying above target, it will be deemed hawkish, likely pressuring the pair lower.

Volatility Looms as USD/JPY Trades into Macro Crossfire_6

Source: BOJ

Traders should also note that major U.S. tech earnings arrive this week. Meta reports after market close Wednesday, with Apple and Amazon following Thursday. These names often beat, and if they do again, it may bolster risk appetite and support carry trades, modestly aiding USD/JPY upside. But if they miss, carry positions could unwind, amplifying downside.

USD/JPY Eyes 149.00 With Momentum Tilting Bullish

Volatility Looms as USD/JPY Trades into Macro Crossfire_7

Source: TradingView

The completion of a three-candle morning star pattern midway through last week set up Friday’s rally, pushing USD/JPY above 147.00 heading into the weekend. On the topside, 148.00 and 149.00 are resistance to watch, especially with USD/JPY recently clustering around big figures. 149.00 is a key hurdle after stalling there earlier this month. With the 200-day moving average just above, it may offer an attractive level to fade strength if the price action were to falter again. Support lies at 147.00 and 146.00 on the downside if a pullback occurs.

The momentum picture from RSI (14) and MACD is tilting bullish with the former beginning to flick higher again while the latter is starting to move towards the signal line from below in positive territory. It’s not an outright bullish message, but it does favour upside over downside.

Source:FOREX.com

To stay updated on all economic events of today, please check out our Economic calendar

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Volatility Looms as USD/JPY Trades into Macro Crossfire

USD/JPY Back in Step With Long-End Yields

Source: TradingView

U.S.–EU Trade Talks: Deal Priced In, But Risks Skewed Lower

U.S. Data Deluge: NFP, GDP, and Core PCE All in Play

Source: LSEG

Source: LSEG

Fed, BOJ Preview

Source: TradingView (U.S. ET)

Source: Bloomberg

Source: BOJ

USD/JPY Eyes 149.00 With Momentum Tilting Bullish

Source: TradingView

Source:FOREX.com

Risk Disclosure