USD/JPY forecast: Double-top pattern points to a retreat

The Japanese yen slipped for the second consecutive day as investors reacted to the latest Federal Reserve minutes, which shed color on what to expect in the coming meetings. 

The USD/JPY exchange rate was trading at 156.60, a few points below the year-to-date high of 157.83. It has jumped by 12% this year, making the Japanese yen one of the top laggards in the developed world.

Fed minutes points to more rate cuts

The USD/JPY exchange rate resumed its uptrend after the Fed published minutes of the last meeting. In that meeting, officials decided to cut rates by 0.25%, bringing the official figure to between 3.50% and 3.75%. 

Minutes released on Tuesday showed that more Fed officials believe that additional rate cuts are appropriate as long as inflation continues falling. 

This statement was notable as the most recent data showed that the headline and core inflation dropped sharply in November. The headline CP dropped to 2.6%, while the core figure fell to 2.7%. Analysts were expecting the figure to show that inflation remained above the 3% target.

Most importantly, there are signs that inflation will move to 2% in 2026 now that the impact of tariffs has started to fade as companies fix their supply chain. 

Therefore, market participants expect the Fed to deliver 2 or three cuts in 2026. The bank may also deliver more cuts than that as Donald Trump has pledged to nominate an official keen on cutting. 

Bank of Japan is tightening

The USD/JPY exchange rate has also risen after the Bank of Japan (BoJ) delivered its interest rate decision. Officials decided to hike interest rates by 0.25%, pushing them to the highest level in three decades. 

Some analysts believe that the BoJ will hike interest rates at least once in the coming year. A Polymarket poll places the odds of a hike on January 23rd at just 2%. The odds of a hike in the March meeting then increase to 16%. 

Therefore, in theory, a divergence between the BoJ and the Fed should be bearish for the US dollar. 

USD/JPY technical analysis 

The daily chart shows that the USD to JPY exchange rate could be on the verge of a bearish breakout. It has formed a double-top pattern at 157.83 and a neckline at 154. A double-top is one of the most common bearish chart patterns in technical analysis.

The MACD and the Relative Strength Index (RSI) have formed a bearish divergence pattern. This pattern forms when oscillators like the MACD and the Relative Strength Index (RSI) start moving downwards when an asset is rising.

Therefore, the most likely scenario is where the USD/JPY pair retreats, and possibly retests the support at 154.34, its lowest level this month. A move below that level will point to more downside in the near term.