Japanese Yen advances to two-week high against a broadly weaker USD

• The Japanese Yen prolongs its uptrend against the USD amid the divergent BoJ-Fed expectations.
• Hopes for an eventual US-Japan trade deal further benefit the JPY and contribute to the move up.
• The fundamental backdrop favors the JPY bulls and backs prospects for a further USD/JPY slide.

The Japanese Yen (JPY) touched a fresh two-week high against a broadly weaker US Dollar (USD) during the Asian session on Wednesday despite the disappointing release of Japan's trade balance data. Investors now seem convinced that the Bank of Japan (BoJ) will hike interest rates again in 2025 amid fears of broader and more entrenched price increases in Japan. The expectations were reaffirmed by hawkish comments from BoJ Deputy Governor Shinichi Uchida earlier this week, which continue to benefit the JPY.

Adding to this, hopes for an eventual US-Japan trade deal offset a generally positive risk tone and did little to dent the prevalent bullish sentiment surrounding the safe-haven JPY. The USD, on the other hand, remains depressed amid the growing acceptance that the Federal Reserve (Fed) will lower borrowing costs further and a surprise downgrade of the US government's sovereign credit rating. This contributes to the USD/JPY pair's decline to the 144.00 mark and supports prospects for a further near-term depreciating move.

Japanese Yen bulls shrug off disappointing trade data amid BoJ rate hike bets

• Government data released earlier this Wednesday showed that Japan's trade balance unexpectedly shrank to a deficit of ¥115.8 billion in April compared to a surplus of ¥559.4 billion in the prior month. Japanese imports shrank at a slower-than-expected pace as a bumper springtime hike in wages boosted private consumption, while export growth slowed sharply on the back of softer US demand following US President Donald Trump's higher import tariffs.
• Japanese and US government officials are set to hold a third round of high-level trade talks in Washington this week. Japan's trade minister Ryosei Akazawa is expected to attend the ministerial-level talks with US Trade Representative Jamieson Greer. US Treasury Secretary Scott Bessent is also expected to take part in the negotiations. US officials are reportedly pressing Japan for an early conclusion to the talks, suggesting that a deal could be reached sooner.
• Bank of Japan Deputy Governor Shinichi Uchida told parliament earlier this week that Japan's underlying inflation is likely to re-accelerate after a period of slowdown and will stay around the 2% target. The BoJ will continue to raise interest rates if the economy and prices improve as projected, Uchida added further. Moreover, the BoJ's Summary of Opinions revealed last week that policymakers haven't given up on hiking interest rates further.
• In contrast, traders ramped up their bets for further rate cuts by the Federal Reserve (Fed) in 2025 following last week's softer-than-expected release of the US Consumer Price Index (CPI) and the Producer Price Index (PPI). Moreover, the disappointing US monthly Retail Sales data increased the likelihood of several quarters of sluggish growth and should allow the Fed to stick to its policy easing bias, which, in turn, drags the US Dollar to a nearly two-week low.
• Fed officials took the opportunity to express concern about the current state of the US economy during a panel discussion on Tuesday. San Francisco Fed President Mary Daly noted that the net impact of the Trump administration's trade, immigration, and other policies is unknown. Adding to this, the Cleveland Fed Bank President said that the sentiment about the economy is concerning, and it will take longer to observe how business decisions are impacted by trade policy.
• China on Monday accused the US of undermining the preliminary trade agreement after the latter issued an industry warning against using Chinese chips that singled out Huawei. Adding to this, China's Commerce Ministry said this Wednesday that US measures on advanced chips are 'typical of unilateral bullying and protectionism.' Furthermore, US chip measures seriously undermine the stability of the global semiconductor industry chain and supply chain.

USD/JPY seems vulnerable to decline further; break below 144.30-144.20 confluence in play

From a technical perspective, the intraday slide drags the USD/JPY pair below the 144.30-144.20 confluence - comprising the 50% retracement level of the April-May rally and the 200-period Simple Moving Average (SMA) on the 4-hour chart. Moreover, oscillators on the daily chart have just started gaining negative traction and underpin a further near-term depreciating move. Some follow-through selling and acceptance below the 144.00 mark will reaffirm the bearish outlook and drag the currency pair to the 143.65-143.60 horizontal support zone en route to the 143.25 region, or the 61.8% Fibonacci (Fibo.) retracement level.

On the flip side, the Asian session peak, around the 144.55 zone, now seems to act as an immediate hurdle, above which the USD/JPY pair could aim to reclaim the 145.00 psychological mark. Any subsequent move up, however, might still be seen as a selling opportunity and remain capped near the 145.35-145.40 region, or the 38.2% Fibo. retracement level. The latter should act as a pivotal point, and a sustained move beyond might shift the near-term bias in favor of bullish traders.