USD/JPY Recovery Rally, EUR/JPY, GBP/JPY in Front of ECB, BoE

USD/JPY has come back to life in a big way over the past week, starting with Scott Bessent’s comment denying that the US had a role in intervention in the Japanese Yen. The question now is whether bulls continue the push as price gets closer the 159.00 level that started the stall previously.

Positioning plays a massively important role in markets although it often goes beneath the headlines, which are usually looking for some bombastic topic to elicit fear in readers (and, in-turn, get clicks). Japanese Yen intervention is one of those topics and it seems like the headlines have called out 30 of the past three legitimate intervention episodes. But, like I pointed out a couple of weeks ago, even as USD/JPY was still dropping, the evidence appeared to be more positioning-based rather than an exogenous intervention push from government sources.

The backdrop around the Yen is still massively interesting, as the carry trade that pushed so clearly in 2021-2022 hasn’t really retraced, so, logically, there’s still a built-in net long position on the back of that move. And while retail traders are probably most familiar with the carry trade from the perspective of swap or rollover, the institutional side of the matter can bring far larger size as there’s opportunity for a spread trade by getting loans in Japan with low rates and then investing elsewhere with higher rates. The problem at that point is exposure in the Yen and if the currency is falling fast, well any gains from the spread can be erased. So, for institutions embarking on such a strategy hedging that currency risk seems a smart thing to do; if the trend is towards JPY weakness, at least.

Those hedges can unwind quickly if the market begins to reverse, however, and if the reversal goes on long enough, the leverage sourced from the underlying carry trade can similarly be taken out of markets. This is why we saw stocks in the US get hit so hard in Q3 of 2024 when USD/JPY carry unwind took over the headlines with force.

In the most recent episode, however, we saw a few intense days of selling before buyers showed up to hold support above 151.95; and since then, bulls have been back in a big way.

USD/JPY Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY 160.00

What created complication before was the pair’s proximity to the 160.00 level and there’s some history there. This is where the BoJ was ordered to intervene twice in 2024, ultimately driving that carry unwind/risk aversion scenario in July of that year. As the pair marched back towards that price last year, USD/JPY stalled and then sold off on the ‘Liberation Day’ tariff theme. This year, the pair similarly marched up to that price and then started to stall, as the Japanese Finance Minister threatened to intervene, and this shifted the perceived risk-reward for the trade.

If there’s a theoretical line in the sand 100 or 150 pips away, and you’re holding on to a hedged position for a carry trade, it can be an attractive time to cut bait, especially as the Bank of Japan just threatened to hike rates and narrow the spread. That can lead to an ‘up the stairs, down the elevator’ type of move which is what took over through last week’s open.

The trend since the Wednesday lows has been incredibly consistent but as we get closer to re-approaching 160 and to a lesser degree, 159, the fear of stalling or pullback returns.

This can, however, make the prospect of support a viable way of approaching shorter-term trends and the same zone that I used for lower-high resistance two weeks ago is now a big spot for bulls to defend, spanning from 154.45-155.00. The 156.27 level would be the ideal spot for buyers to defend on short-term pullbacks but given the veracity of the week-long trend, we have to open the range of possible scenarios a bit more.

USD/JPY Hourly Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/JPY

Few economies seem to want a strong currency these days and we’ll probably hear more about that from the European Central Bank at tomorrow’s rate decision. The EUR/JPY pair held support at 182.00 quite well and has now tipped up for a test of the 185.00 handle. But I think the more attractive scenario here is if Christine Lagarde can help to drive a pullback in the single currency, allowing for a support test and higher-low.

I have two zones on my radar for tomorrow:  The first is a spot of prior resistance at 184.28 and the next a zone from 182.65-183.16.

EUR/JPY Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

GBP/JPY

At this point I still like GBP/JPY a bit better and the fact that the pair just pushed up to a fresh 18-year high illustrates that point. There’s also cleaner bullish structure, in my opinion, and the prior zones of resistance make for a clear area to look for buyer support to play-in around tomorrow’s Bank of England rate decision.

The prior swing point held around the 210 level I looked at in last week’s webinar and that opens the door for support at either s1 of 213.50, s2 of 212.60 or s3 between 211.42-211.59.

GBP/JPY Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

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