USD/JPY struggles as Fed policy decision and US-China trade talks loom

• USD/JPY trades in a narrow range ahead of the Fed's May policy decision, reflecting investor caution.
• Market participants brace for signals on future rate cuts amid mixed US economic data.
• Technical levels show a challenging path for bulls, with resistance near 144.00 and support around 142.20.

The USD/JPY pair is trading in a tight range as markets await the US Federal Reserve's (Fed) policy decision on Wednesday. Investors widely expect the central bank to keep its policy rate unchanged in the 4.25%-4.50% range for the third consecutive meeting, despite rising economic uncertainties. Meanwhile, optimism over US-China trade talks in Switzerland has provided some support to the US Dollar (USD), limiting the safe-haven appeal of the Japanese Yen (JPY).

Ahead of the Fed's meeting, the US Dollar Index (DXY) has stabilized near 99.40 after three consecutive days of losses. This reflects a cautious tone as investors weigh mixed economic signals. The CME FedWatch Tool indicates that traders see virtually no chance of a rate cut in May but assign a 30% probability for a 25 basis point cut in June. This uncertainty has kept the USD in a consolidation phase, particularly against the JPY, which has weakened amid reduced demand for safe-haven assets.

Additionally, US policymakers have expressed concerns about a potential economic slowdown. Minneapolis Fed President Neel Kashkari recently highlighted that some businesses are preparing for possible layoffs if uncertainty persists. This cautious tone was echoed by Fed Governor Christopher Waller, who suggested that rising unemployment could pave the way for future rate cuts. Despite stronger-than-expected Nonfarm Payrolls data for April, which showed 177,000 jobs added versus the expected 130,000, markets remain hesitant to fully discount a June rate cut.

Technical Analysis

From a technical standpoint, USD/JPY faces significant resistance around 144.00, with further barriers at 144.68 and 146.70. On the downside, support is seen near 142.20, with critical levels at 140.00 and 139.50 if bearish momentum picks up. The RSI is neutral around 46.25, indicating a lack of strong directional bias, while the MACD is generating a buy signal, suggesting a potential short-term recovery. However, longer-term moving averages like the 100-day SMA (150.63) and 200-day SMA (149.62) maintain a bearish outlook, reflecting a broader downtrend.

In summary, USD/JPY is likely to remain in a consolidation phase as traders await clarity from the Fed's policy statement and post-meeting press conference. Any dovish signals from Fed Chair Jerome Powell could pressure the pair toward lower support levels, while a more hawkish tone might provide the USD with a temporary boost.

Daily Chart