Japanese Yen Outlook: USD/JPY Plunge Loses Steam, but Risks Remain

USD/JPY is trying to stabilise after its sharpest four-day loss in nearly two years, but the outlook remains fragile. Japan's intervention, backed by the US Treasury and supported by a new Fed repo facility, has increased the credibility of future yen-buying operations, leaving traders alert for opportunities to fade rallies.

View related analysis:

Why USD/JPY Risks Remain Despite the Sharp Selloff

Fed Support Adds Weight to Yen Intervention

The -3.2% loss for July marked the worst month for USD/JPY in fifteen and its most volatile trading range in six. Most of that loss occurred in the final two days of the month, thanks to intervention from Japan's Ministry of Finance (MOF) and support from the US Treasury. Traders remain on guard for further declines after the MOF vowed to intervene again, with the Fed making that easier by opening a repo facility for Japan. This allows Japan to borrow US dollars against its Treasury holdings to buy yen instead of selling US Treasuries, removing a key constraint on future intervention.

In simple terms, the facility gives Japan greater firepower to sell US dollars and buy yen, increasing bearish pressure on the greenback if authorities intervene again.

Source: ICE, TradingView

History Shows MOF Intervention Can Trigger Sharp USD/JPY Declines

The weekly chart shows how deep USD/JPY corrections have been following MOF interventions. The pair has already fallen 5.3%, surpassing the post-intervention decline seen in April, although it still trails the deeper selloffs following MOF action in October 2022, November 2023 and July 2024.

Whether we'll see declines of a similar magnitude this time remains debatable, given the potential for further Fed rate hikes and persistent inflationary pressures from higher crude oil prices amid ongoing Middle East tensions. However, with the US Treasury and Fed backing Japan, MOF jawboning is more likely to cap rallies, while any future interventions now carry greater credibility. That could keep USD/JPY and other yen crosses firmly on traders' 'fade the rally' watchlists.

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

The daily chart shows the intense two-day selloff on Thursday and Friday culminated in a volatile doji. Notably, the session low held above the 155.00 handle, the May low and the monthly S1 pivot point. With the daily RSI also deeply oversold, bears may want to tread cautiously around these lows.

The 1-hour chart shows prices grinding higher in what could be a corrective pattern, while declining volumes suggest a lack of conviction among bulls. Even so, they may still attempt a move towards the 200-period EMA. If the MOF allows, a break above 158.00 brings the high-volume node (HVN) and monthly pivot point into focus around the 159.00 handle.

Should prices bounce from here, bears may look to fade rallies into those resistance levels, particularly with the backing of the MOF and Fed. A break below 155.00 would then bring the January low near 152.00 into focus.

Source: ICE, TradingView

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Products and services available depend on your location and the entity holding your account. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

FOREX.com is a registered FCM and RFED with the CFTC and member of the National Futures Association (NFA # 0339826). Forex trading involves significant risk of loss and is not suitable for all investors. Full Disclosures and Risk Warning. Increased leverage increases risk.

GAIN Capital Group LLC (dba FOREX.com) 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA. GAIN Capital Group LLC is a wholly-owned subsidiary of StoneX Group Inc.