Given the recent de-escalation in trade policy tensions, the USD is expected to regain some short-term strength, although uncertainty remains. Meanwhile, a dovish BoJ stance and lack of progress in US-Japan trade talks are likely to weigh on the JPY in the near term.

USD: The King is return?

The “sell America” narrative has largely subsided. The dollar’s recovery reflects this shift: the FX confidence crisis appears to be over. This rebound has been supported by a softening in trade policy rhetoric, with Trump preparing to ease tariffs on auto parts and to grant imported vehicles relief from separate levies on steel and aluminium. This development offers significant relief for South Korea and Japan in the Asia region, given their high exposure to U.S. auto exports. The latest move to ease tariffs adds to the signals that Trump may be willing to scale back certain import duties. Additionally, Bessent noted that tariff-related uncertainty is likely to diminish on a daily and weekly basis, while Lutnick mentioned that a trade deal has been reached with one country—though the name could not be disclosed. Most importantly, China indicated its willingness to engage in discussions with the U.S. on trade policy, provided that the U.S. is prepared to correct its “erroneous” practices and cancel unilateral tariffs. Concurrently, the Wall Street Journal reported that Beijing is considering offering concessions on fentanyl as a gesture to reinitiate trade talks. Later reports added that China’s top public-security official, Wang Xiaohong, has been inquiring about U.S. expectations regarding fentanyl precursors. These more conciliatory trade developments have helped lift market sentiment and contributed to the dollar’s recovery from the “sell America” pressure seen since "Liberation Day." That said, the key question now is whether incoming data and policy developments are sufficient to justify a sustained global rotation away from the dollar as a reserve asset beyond the short term.

Beyond trade policy, the most significant macroeconomic data released last week continue to show that the U.S. economy remains resilient, with inflation appearing under control. Beginning with the PCE report, although the data showed a mixed picture—monthly growth softened while year-over-year figures accelerated—the overall message indicates that the disinflation process remains intact. The Fed is therefore likely to maintain its wait-and-see approach and seek greater clarity before considering any policy changes. Additionally, the April U.S. jobs report showed 177,000 new jobs added, with the unemployment rate steady at 4.2%, signaling a still-solid and healthy labor market. These labor market readings support the view that the Fed is in no rush to cut rates. Consequently, both Barclays and Goldman Sachs have pushed their expected timing of Fed rate cuts from June to July. As for Q1 GDP, although growth slowed to 0.3%, this was largely driven by a spike in imports in anticipation of potential tariffs, while household consumption remained robust. Altogether, the softening in trade tensions, coupled with the strength of the U.S. economy, suggests that fears over recession or the end of U.S. exceptionalism may be overstated, offering short-term support to the USD.

That said, medium-to long-term uncertainties persist. Several sectors still face tariff threats, and uncertainty remains elevated despite a 90-day postponement, pushing potential escalation to early July. Moreover, foreign investors hold approximately USD 18.5 trillion in U.S. equities (as of end-2024), meaning even a modest 5% reduction in exposure could result in USD 900 billion to 1 trillion in USD selling. U.S. assets are arguably over-owned, and this could lead to further dollar weakness. Still, if trade negotiations—particularly with China—do not proceed smoothly, the dollar could face additional downside. Once the economic impact of tariffs begins to show up in the hard data and forces the Fed to respond with rate cuts, the “sell America” narrative could return.

Looking ahead, the key event for the USD is the upcoming FOMC meeting, where the Fed is widely expected to keep rates unchanged despite political pressure from the Trump administration. As a reminder, Chair Powell has emphasized that a strong labor market cannot be sustained without price stability, stating, “our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.” This reinforces the low likelihood of an imminent rate cut. The Fed may acknowledge the conflicting impact of Trump’s policies on its dual mandate, but it will likely use the opportunity to assert its independence, which could support the USD. Beyond this, market participants will closely watch for any signals at the FOMC meeting that suggest the Fed may resume rate cuts at the June meeting. However, following the solid April nonfarm payrolls report, a rate cut in June now seems less likely and will depend heavily on incoming U.S. data softening meaningfully in the coming weeks.

In summary, the short-term outlook for the USD remains moderately bullish, as the recent easing in trade tensions has provided some relief to the market. Consequently, headlines on trade deals will continue to drive FX market activity, with further positive developments likely to strengthen the short-term outlook. Conversely, the long-term outlook remains uncertain due to ongoing trade negotiations with key partners, particularly China. Should trade tensions escalate further, the USD could face significant headwinds.

JPY: Dovish BoJ

The strength of the JPY since ‘Liberation Day’ has been fading gradually, largely due to the positive developments in global trade that lifted risk sentiment and reduced safe haven demand. Further weakness in the JPY also came from the lack of progress in trade negotiations between the US and Japan. The second round of trade talks in Washington showed no new developments, and Japan's trade negotiator, Akazawa, stated that another high-level meeting will be held in mid-May to accelerate the talks—suggesting a breakthrough is unlikely in the near term. Meanwhile, the BoJ’s dovish stance at the May meeting further weighed on the JPY.

Indeed, the BoJ’s latest quarterly outlook report showed a sizable downward revision in GDP and inflation forecasts for FY2025. At the press conference, Governor Kazuo Ueda emphasized the high level of uncertainty surrounding trade and the BoJ’s growth outlook. This uncertainty was clearly a major factor in the BoJ’s decision to keep rates steady in the May meeting. The latest GDP growth forecast was lowered to 0.5%, though the BoJ still expects the economy to grow at a pace close to potential, supported by solid private consumption despite external headwinds. Although inflation forecasts were also revised lower, Ueda noted that the "delay in price goal timing doesn't mean a delay in hikes," suggesting that the BoJ remains committed to policy normalization. However, given the BoJ's inability to confidently assess future US trade policy or tariff outcomes, future rate decisions will likely depend on how those dynamics unfold. This wait-and-see stance until a US-Japan trade agreement is finalized, coupled with increased caution about further rate hikes, continues to weigh on JPY strength in the short term.

That said, the JPY remains fundamentally supported over the medium to long term. April's uncertainties have contributed to expectations of a meaningful US slowdown and Fed easing in H225. Additionally, there's the lingering possibility of a Mar-a-Lago-style accord, where Washington may request a stronger yen in exchange for reduced tariffs—a factor that could discourage aggressive shorting of the yen or renewed yen-funded carry trades if FX volatility continues to decline. Moreover, the potential global growth drag from tariffs, and further rate cuts from other major central banks like the Fed, would narrow yield spreads and support JPY over time.

Looking ahead, the JPY calendar is light, with no major domestic market-moving events. As such, JPY movement will largely be driven by external developments—particularly global trade headlines and the upcoming FOMC meeting. Any further positive news between the US and China will likely continue to weaken JPY demand, and a hawkish Fed will also weigh on JPY in the near term. Unless the Fed signals a dovish shift (unlikely given last week's strong US job report), the JPY may remain soft. In summary, while near-term weakness persists, the baseline outlook for the JPY remains supported over the medium to long term.

JPY: Dovish BoJ

The strength of the JPY since ‘Liberation Day’ has been fading gradually, largely due to the positive developments in global trade that lifted risk sentiment and reduced safe haven demand. Further weakness in the JPY also came from the lack of progress in trade negotiations between the US and Japan. The second round of trade talks in Washington showed no new developments, and Japan's trade negotiator, Akazawa, stated that another high-level meeting will be held in mid-May to accelerate the talks—suggesting a breakthrough is unlikely in the near term. Meanwhile, the BoJ’s dovish stance at the May meeting further weighed on the JPY.

Indeed, the BoJ’s latest quarterly outlook report showed a sizable downward revision in GDP and inflation forecasts for FY2025. At the press conference, Governor Kazuo Ueda emphasized the high level of uncertainty surrounding trade and the BoJ’s growth outlook. This uncertainty was clearly a major factor in the BoJ’s decision to keep rates steady in the May meeting. The latest GDP growth forecast was lowered to 0.5%, though the BoJ still expects the economy to grow at a pace close to potential, supported by solid private consumption despite external headwinds. Although inflation forecasts were also revised lower, Ueda noted that the "delay in price goal timing doesn't mean a delay in hikes," suggesting that the BoJ remains committed to policy normalization. However, given the BoJ's inability to confidently assess future US trade policy or tariff outcomes, future rate decisions will likely depend on how those dynamics unfold. This wait-and-see stance until a US-Japan trade agreement is finalized, coupled with increased caution about further rate hikes, continues to weigh on JPY strength in the short term.

That said, the JPY remains fundamentally supported over the medium to long term. April's uncertainties have contributed to expectations of a meaningful US slowdown and Fed easing in H225. Additionally, there's the lingering possibility of a Mar-a-Lago-style accord, where Washington may request a stronger yen in exchange for reduced tariffs—a factor that could discourage aggressive shorting of the yen or renewed yen-funded carry trades if FX volatility continues to decline. Moreover, the potential global growth drag from tariffs, and further rate cuts from other major central banks like the Fed, would narrow yield spreads and support JPY over time.

Looking ahead, the JPY calendar is light, with no major domestic market-moving events. As such, JPY movement will largely be driven by external developments—particularly global trade headlines and the upcoming FOMC meeting. Any further positive news between the US and China will likely continue to weaken JPY demand, and a hawkish Fed will also weigh on JPY in the near term. Unless the Fed signals a dovish shift (unlikely given last week's strong US job report), the JPY may remain soft. In summary, while near-term weakness persists, the baseline outlook for the JPY remains supported over the medium to long term.

USD/JPY 4H

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