The Trump Trade: USD/JPY at Critical Juncture as Inflation and Trade Risks Mount

Trump’s aggressive trade policies have shaken global markets and triggered currency volatility. Rising tariffs, inflation risks, and political pressure on the Fed are weakening the US dollar. Moreover, the Japanese yen is gaining strength as a safe haven. As a result, USD/JPY trades at a critical support level near 140, where a breakdown could signal a long-term decline.

How Trump’s Trade Policy Is Shaking Global Markets

China’s Response and Global Market Impact

Trump has raised tariffs on Chinese goods to 145% and introduced “reciprocal tariffs” on multiple countries. These aggressive actions disrupted trade flows and added pressure on global supply chains. As a result, China’s Ministry of Commerce vowed strong retaliation and warned that any country siding with the US would face countermeasures. This geopolitical threat has created uncertainty across Asia-Pacific markets, with Japan’s Nikkei 225 dropping to around 26,500 on Monday.

However, the impact of this geopolitical uncertainty is spreading to Europe and commodity-exporting countries. Moreover, China has restricted exports of critical minerals and imposed 125% tariffs on US goods. This affects the semiconductor, auto, and industrial metals sectors.

Powell’s Dilemma and Uncertainty

On the other hand, President Trump’s messages to Federal Reserve Chair Powell, including repeated calls for rate cuts, have unsettled investors’ confidence. If rate cuts occur under external influence while inflation rises due to tariffs, the US dollar’s credibility may erode. A weaker dollar could trigger capital flight from US assets to other asset classes. Trade instability, inflation risks, external pressure on the Fed, and slowing growth contribute to the weakness in the US dollar.

US-Japan Trade Tensions Escalate: Auto Tariffs and Yen Surge

Trump’s 25% tariff on car imports opposes the 2019 US-Japan trade deal. Prime Minister Shigeru Ishiba expressed serious concerns over this contradiction. Since cars are a major part of Japan’s exports and vital to its economy, the tariffs have created uncertainty in the Japanese market. These tariffs could also put millions of auto-related jobs at risk.

The Japanese yen reacted to this tension and increased sharply, sending the US dollar to a seven-month low of 140.61 Yen. Markets fear that Japan may be pressured to strengthen the yen to reduce the US trade deficit, which could further harm Japanese exports.

Despite recent tensions, the US trade deficit narrowed to $122.7 billion in February 2025 from a record $130.7 billion in January. However, this decline was likely temporary and driven by front-loaded imports ahead of expected tariffs.

On the other hand, Japan’s trade surplus rose to JPY 544.1 billion in March, boosted by strong export growth. If tensions escalate, the US may push further tariff measures to reduce its trade gap, which could trigger more volatility in global markets and place Japan’s surplus under stress.

Inflation Fears and Stagflation Risks Weigh on Consumer Sentiment

The market fears due to President Trump’s tariffs have pushed prices higher. Consumers face increased costs on autos, electronics, and household items. Moreover, consumers rushed to buy before prices surged, boosting retail sales by 1.4% in March 2025, as shown in the chart below. However, this demand spike appears temporary and is driven by market uncertainty and fears.

On the other hand, Chair Powell stated that tariffs raise inflation and slow growth. However, he made it clear that the central bank won’t intervene solely to curb market volatility. This uncertainty from Powell has heightened stagflation risks in the market.

In the current market environment, inflation is rising while growth is slowing. As a result, the Fed must choose between fighting inflation and supporting jobs. Consequently, this uncertainty has weakened its ability to ease pressure on households and businesses. The chart below shows that consumer inflation expectations rose to 3.6% in March 2025, while the University of Michigan’s 5-year inflation expectations surged to 4.4% in April 2025.

This strong market uncertainty pushed the S&P 500 (SPX) lower after Powell’s hawkish tone, as resistance at 5500 held. Moreover, financial conditions are tightening rapidly, with the Chicago Fed Index rising to -0.42. This increase indicates reduced credit flow and growing financial stress.

The stagflation environment has increased bearish pressure on the US Dollar Index. Investors see rising inflation risks and external pressure on the Fed, which undermines confidence in the currency. However, this uncertainty has triggered a flight to safe havens, pushing gold (XAU) prices toward the $3,400 region.

US Dollar Breakdown Looms Amid Policy Chaos and Safe-Haven Demand

The above-mentioned factors have contributed to a strong decline in the US dollar. The monthly chart for the US Dollar Index shows that the index is approaching the long-term support zone in the 96–96.5 range. However, based on current market fundamentals, the US dollar is likely to continue moving lower. Therefore, a break below this support could open the door to longer-term support around 90. The emergence of an ascending broadening wedge pattern and breakdown suggests that the index will likely continue to decline.

USD/JPY at Critical Juncture: 140 Yen Support Faces Breakdown Risk

The sharp drop in the US Dollar Index may trigger a flight to safety into the Japanese yen, with USD/JPY now trading at the pivotal level of 140 JPY. This level was reached after multiple rejections from the long-term resistance zone around 160 JPY. The 160 JPY resistance level remains strong, and failure at this resistance could lead to a breakdown below the 140 JPY support zone. A break below 140 JPY may trigger a long-term decline in USD/JPY. This bearish outlook is also supported by a bearish divergence on the RSI, which is dropping from extreme overbought levels.

Based on the weakness in the US dollar, USD/JPY is at a critical juncture. The ongoing trade tensions under President Trump’s administration make a significant drop in the pair more likely. From a technical perspective, symmetrical triangle patterns formed between 1995–2005 and 2016–2021. These patterns failed to break the key level of 161 JPY. This failure indicates a likely downward direction for the pair in the long term. Therefore, USD/JPY is expected to break below 140 and continue its decline. Moreover, this move is supported by safe-haven demand for the Japanese yen.

To further understand the above discussion, the weekly chart below further highlights the long-term support at 140 Yen. The chart shows the formation of an ascending channel, with the price currently trading at the junction of the black dotted trendline and the rising red trendline. This intersection represents a strong pivotal area. However, the emergence of a double top at 162 Yen and 162.43 Yen suggests that a break below 140 Yen could trigger a sharp drop in USD/JPY. Traders may continue to sell USD/JPY on any strength, targeting much lower levels.

Bottom Line

Trump’s aggressive tariffs on Chinese goods and other countries have disrupted global trade flows and shaken investor confidence. Meanwhile, China’s retaliation, including export bans and 125% tariffs on US goods, has worsened supply chain stress and impacted key sectors like semiconductors and autos. Inflation is rising due to higher import costs from tariffs while economic growth slows, increasing the risk of stagflation in the US.

At the same time, Japan’s economy faces uncertainty. Trump’s auto tariffs threaten export-related jobs. These political and economic risks have pushed the US dollar to the long-term support zone of 96–97. A breakdown at this level now appears likely. The sharp drop in the US dollar has increased safe-haven demand for the Japanese yen. As a result, USD/JPY has fallen to a critical support level around 140 JPY. A break below this pivotal level could trigger a long-term decline in USD/JPY toward the 127 JPY.