USD/JPY Still Driving the Dollar Basket as DXY Tests Key Resistance

It’s been a comeback type of week for USD/JPY so far but perhaps the larger test is what lies ahead. The pair was in breakdown mode last week even with what probably would’ve been expected to be bullish drivers, in the form of a Sanae Takaichi/LDP win in the weekend elections and then a relatively strong NFP report on Wednesday. But both instances turned out bearish performances in the USD/JPY pair with an especially stark reversal showing around that NFP print after the pair initially flared up to a test of 154.45. I shared my opinion on what was going on in this week’s webinar but perhaps more important than the ‘why’ behind last week’s meeting is the ‘what’ behind the weekly close.

USD/JPY eventually found support at 152.50 last week and that held through this week’s open, with buyers stretching above resistance yesterday to elicit a re-test of a major psychological level today. The big question now is whether bulls continue to push to allow for another break of the big figure, or whether we see another painful Friday sell-off such as what showed up in late-January, driven by accusations of intervention following the BoJ meeting.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

As I looked at last week and even the week before that I’m of the opinion that USD/JPY is doing much of the driving for the DXY basket and, in-turn, the FX market. I get that this might sound counter-intuitive given the Yen’s relatively slight 13.6% weight in the Dollar basket, but one look at the pair going back to the 2021 open explains why I believe this to be the case, and that draws right back to the build of the carry trade.

With the almost 50% rally in USD/JPY compared to a USD that’s relatively flat against the Euro or British Pound, it becomes apparent that it’s the Japanese Yen weakness that’s largely held up the Greenback. This is driven by demand, of course, and that demand means a building long position in the marketplace. This demand likely emanates from both hedges on carry trades and natural demand towards the high-yielder and supply of the low-yielder; but the major downside of crowded positions is that they can fast lead to crowded exits, such as we saw in the first few months of last year or in Q3 of 2024.

USD/JPY (in blue) Holding up the Weight of the Dollar Basket

Chart prepared by James Stanley; data derived from Tradingview

In both instances, we saw USD weakness against the Euro and British Pound despite the fact that there wasn’t really a strong fundamental argument for the move. Instead, this was more rooted towards USD-weakness on the back of collapsing carry trades which, in-turn, punished the Dollar and buoyed counterparts in the EUR/USD or GBP/USD pair.

So, while tomorrow’s Core PCE report is important as is the PMI report a little later in the day, it’s probably the rally in USD/JPY that is most meaningful as to whether USD bulls can make a stronger forward push.

In the US Dollar, we have a similar resistance test at a major level right now, the same price that held support in April of last year before becoming a regular occurrence later in 2025 trade.

US Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

From the four-hour chart of USD/JPY, there’s a valid basis for that argument. When I looked at the pair in the Tuesday webinar we had a range that had built with resistance holding at a familiar level of 153.67. That has since given way and we now have a higher-high on the four-hour to go along with a breach and test above 155.00.

At this point, even a pullback to 153.67 could retain bullish scope, but ideally, bulls would hold the lows above the 154.45 level to allow for a drive up to re-test 156.27, after which 157.90 comes back into the picture.

I want to be careful with that latter level as we’ve seen a lot of fear on the long side as price has approached those high water marks closer to the 160.00 handle. I think the expectation for possible intervention, combined with the heavy one-sided bullish sentiment, makes for the prospect of bullish breakouts beyond those levels a difficult argument to muster.

USD/JPY Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro