USD/JPY Tests 160.00 – Breakout or Fake Out?

USD/JPY Talking Points:

• USD/JPY was primed for a breakout earlier in the week and I looked at this as one of the cleaner setups for USD-strength scenarios in the Tuesday webinar.
• The pair has since broken out and pushed up to fresh two-month-highs, with this morning bringing in a re-test of the 160.00 psychological level.
• So far that price has held buyers at bay – but there’s also been an active response to pullbacks and unless there’s an intervention threat in the next 18 hours, that line-in-the-sand is vulnerable to breakouts.

USD/JPY last tested the 160.00 handle in early-September, and it was an intervention threat ahead of Labor Day weekend that sent the pair spiraling lower. At that point, markets were still very much guessing when or where authorities might jump in as it was the late-July defense of 164 that made a noticeable push in the market. The September sell-off ultimately saw the pair slide by more than 700 pips, but shortly after buyers stepped back in and, perhaps ironically, it was when Scott Bessent made a direct threat towards markets that USD/JPY formed a bottom and started to rally in a move that’s largely lasted ever since.

With CPI coming in strong this week and rate hike expectations around the Fed growing more hawkish, USD/JPY has remained as one of the more attractive venues for USD-strength. The carry is still positive on the long side of the pair, and with inflation in the US outpacing that of Japan, it’s difficult to project any significant changes on the horizon on that front.

As looked at on Monday, USD/JPY price action was coiled in the form of an inverse head and shoulders pattern, marked by a neckline taken from a trendline. That has since yielded to breakout, and now bulls have an open door to make a push.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY Shorter-Term

The question at this point is whether we see another verbal intervention threat. It seems that an actual intervention at this point wouldn’t make much sense although it can’t completely be ruled out. If there is an intervention, it would do little to change the fundamental bias behind the matter and it would simply allow for bulls to re-load at more favorable prices at some point in the next week.

This is front-and-center with the USD/JPY market as it’s that very fundamental bias that remains of issue, and as long as that persists, there’s little reason to look at bearish themes in the pair as anything more than a short-term pullback kind of theme, particularly if they’re being pushed by policymakers. And that includes whether it’s the actual burning of cash reserves or just the threat of it.

At this point, from the hourly chart, we can see where that initial hit at 160.00 was met with a bid and prices are already angling up for a second test of the big figure.

USD/JPY Hourly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

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