- USD/JPY reversal tests uptrend support near 159
- Intervention warning emerges as pair nears 160
- RBA decision and JGB auction in focus
USD/JPY Reversal Puts Uptrend in Focus
USD/JPY pulled back sharply on Monday, but the catalyst was hardly convincing.
The move followed a sudden reversal in the US dollar alongside a slide in Treasury yields despite little in the way of fresh fundamental news. Crude oil futures also reversed earlier gains even though no countries have so far agreed to join the United States in escorting energy tankers through the Strait of Hormuz. Given the role energy supply fears have played in supporting the greenback recently, the pullback looked more like positioning than a genuine shift in the macro narrative.
For USD/JPY specifically, the timing was interesting. Japan’s finance minister Satsuki Katayama warned authorities were prepared to take “decisive steps” to address volatility in currency markets as the pair approached the 160 level. Given Japan’s history of intervention and rate checks around these levels, the comments likely provided traders with a convenient excuse to trim long positions.
Source: TradingView
But can a bearish reversal candle be trusted on its own when it arrives without a clear fundamental trigger? Probably not. Ideally, traders would want to see follow-through selling before treating Monday’s move as anything more than a pause in the broader uptrend.
Technically, USD/JPY now finds itself at an important junction. The pair is pressing against uptrend support dating back to the January lows while also sitting just above the messy 159.00 level that repeatedly capped rallies earlier this year before finally giving way last week.
Momentum signals are also starting to look less convincing. RSI (14) has broken the uptrend that accompanied the rally while MACD is beginning to flatten and edge back towards the signal line after an extended climb. When momentum deterioration occurs at trend support it often forces a decision from traders.
That leaves a simple choice. Follow through on the bearish price signal and risk breaking the uptrend, opening the door for a deeper pullback towards support near 157.88. Or defend the trend and accept the growing threat of Japanese intervention as the pair edges closer to the psychologically important 160 level.
So far this month the pair has largely traded off sentiment surrounding how long energy disruptions may last. The United States benefits from its position as a largely self-sufficient energy producer while Japan sits at the opposite end of the spectrum, leaving the yen vulnerable when oil prices surge. But Monday’s reversal in crude suggests the geopolitical tailwind for the dollar may be starting to weaken.
RBA Decision Could Shape G10 FX
Two other developments may also influence direction on Tuesday. The RBA interest rate decision later today could prove important for the broader G10 FX complex. A 25 basis point hike is only priced at around a 62% probability in futures, but if delivered as most economists expect it would reinforce the policy divergence trade between a Federal Reserve still expected to cut rates later this year and other major central banks where tightening remains on the table, potentially weighing on the US dollar.
However, if the RBA opts to hold steady it may raise questions about how willing other central banks will be to hike rates in the current environment. Given Australia was already dealing with a clear domestic demand-driven inflation problem before the Iran conflict erupted, such an outcome could be interpreted as a sign of broader policy caution, potentially supporting the dollar instead.
Bond markets may also offer clues. A pair of 20-year government bond auctions in Japan and the United States will take place on Tuesday. The US tenor is often dismissed due to patchy demand, but in Japan the maturity is more widely followed. The result should therefore provide a clearer signal on investor appetite for Japanese government debt at a time when markets are increasingly focused on the potential fiscal implications of a prolonged energy crisis. Weak demand could fuel renewed yen weakness while a strong bid may help calm nerves and support the currency.
For more context on the broader forces shaping USD/JPY ahead of the Federal Reserve and Bank of Japan decisions later this week, see my weekend primer.
