There is a huge interest rate expectation gap between the United States and Japan, so USDJPY is perched at high levels.

The Forex market is on the back foot in early trading this week due to the North American holiday and the lack of fresh catalysts. Meanwhile, USD/JPY has been solidly holding above 150.00 since the middle of last week.

The recent warning from Japanese officials only dampened the selloff in the yen but was unable to boost the exchange rate. This is because there is a huge gap in interest rate expectations between the United States and Japan.


The Fed funds rate is currently at 5.25%-5.50% and is unlikely to change until mid-year. The release of retail sales data last week was disappointing but failed to disrupt expectations.

Very high US producer inflation and consumer inflation data have prompted the market to push back the Fed's initial rate cut expectations until June. Market participants also reduced the total forecast for rate cuts in 2024 to 90 basis points, whereas the previous forecast had reached 160 basis points.

At the same time, Japan's interest rate expectations remain near zero. Japan's economy slipped into recession in the fourth quarter of 2023, so the market is again pessimistic about the prospects for a BoJ rate hike.

"At the moment, the data coming in from Japan is telling us that it's not as rosy as what the BOJ would like to see in order to begin moving away from negative interest rates," said Rodrigo Catril, senior currency strategist at National Australia Bank.

"We're still stuck in these ranges to some extent, and waiting for more meaningful or material data to swing us one way or the other," said Catril. "So for that, data coming from the U.S. remains paramount."

This week's Forex calendar is fairly devoid of high-impact events from the land of Uncle Sam. There are only a handful of events scheduled for the next few days, namely the publication of the Fed's FOMC meeting minutes on Wednesday and the release of S&P's US Manufacturing and Services PMIs on Thursday.