Will the Dollar lose the battle against the Yen this week?

Buckle up, traders! The Dollar and Yen are set to battle it out in a pivotal week that could set the tone for months ahead.

Imagine a high-stakes boxing match: in one corner, the US Dollar hovers around the shaky 99.33 level, tangled in tariff drama, trade policy confusion, and surging inflation worries. In the opposite corner, the Japanese Yen is cautiously optimistic, balancing hopes of trade agreements with a watchful eye on central bank moves.

Let's examine each currency's strengths and weaknesses and consider the factors likely to influence this showdown.

Round 1: Dollar’s growing tariff and inflation woes

The US Dollar started this crucial week on the back foot. Despite optimistic claims from US officials about "daily conversations" with China and other Asian trade partners, China quickly contradicted these assertions, flatly denying any ongoing negotiations. 

This confusion has led analysts, including those from Standard Chartered, to warn that expectations for reduced global tariffs under the current US administration might be overly optimistic. They point to the sidelined World Trade Organisation and stalled free trade agreements.

Adding tangible pressure, popular Chinese e-commerce sites Temu and Shein have dramatically increased their prices - by as much as 300% for US consumers - highlighting the immediate and personal costs of unresolved tariff disputes. 

Traders are closely watching key economic data releases this week, including US GDP figures and April’s Nonfarm Payrolls, to gauge the Federal Reserve’s next moves amid soaring inflation expectations.

Round 2: Yen’s delicate balance: BOJ policy impact on Yen

In contrast, the Japanese Yen enters this week with cautious movements, influenced by mixed market signals. While easing tensions between the US and China weakened safe-haven demand, geopolitical risks, including North Korea’s involvement in the Russia-Ukraine conflict, help maintain the Yen’s appeal as a safer asset.

This week's pivotal event for the Yen is Thursday’s Bank of Japan (BoJ) policy meeting. Although the BoJ is expected to keep interest rates unchanged, ongoing inflation pressures in Japan could pave the way for future rate hikes. 

Additionally, expectations of a potential US-Japan trade deal might support the Yen. Yet traders remain wary, waiting for clearer signals from BoJ Governor Kazuo Ueda on Japan’s economic outlook and inflation trajectory.

Round 3: US Inflation expectations - impact on the dollar

Adding complexity to this currency clash is the intensifying problem of US inflation. Recent surveys by the University of Michigan have shown sharp increases in long-term inflation expectations, contradicting earlier reassurances by Fed Chair Jay Powell that these were temporary anomalies. 

Commerzbank’s Head of FX and Commodity Research, Ulrich Leuchtmann, emphasises that rising inflation expectations put the Fed in a precarious position: either tackle inflation aggressively and risk unemployment spikes or delay intervention and risk runaway inflation.

Fed Governor Christopher Waller’s recent suggestion of possible rate cuts to counter rising unemployment from tariff-induced economic stress faces stiff challenges if inflation expectations remain elevated. This conflict leaves the Fed - and consequently, the Dollar -in a precarious position.

Currency pair technical analysis: Which currency emerges victorious?

Both currencies are navigating treacherous paths this week, with significant implications for investors and traders worldwide. The Dollar faces daunting challenges from trade policy uncertainty, rising consumer costs, and inflation pressures, while the Yen must carefully navigate geopolitical complexities and cautious economic policy.

By the end of this critical week, we'll see clearly which currency withstands these tests better. Will the Dollar rebound, or will the Yen’s cautious strategy pay off? 

At the time of writing, the dollar shows some strength after a steep slide against the yen. A recent bearish crossover suggests that more dollar weakness could be in the offing, and the pair could resume the downward trajectory. The volume bars also show that a dead cat bounce situation could be seen if the dollar succumbs to sell-side pressure. Key levels to watch should the dollar bounce back should be the $143.76, $147.83, $151.17, and the $154.18 resistance levels. 

Are you looking forward to this week’s crucial data? You can speculate on USD/JPY pair with a Deriv MT5 or Deriv X account.