USD/JPY Talking Points:
- It’s been a dichotomous backdrop in USD/JPY, as longer-term charts illustrate a clear shift into a more bearish backdrop but on a shorter-term look, bulls have continued to pile in after pullbacks.
- Last week saw a resistance test at 159 and that drove a pullback to a support level at 156.68. That level gave a 100+ pip bounce yesterday, but noticeably, bulls haven’t continued the push. A heavy dose of data in the back-half of the week may have something to do with that.
One look at the weekly chart and it’s clear that a shift has shown up recently in the USD/JPY pair. And, really, over the past five years there’s been a similar push-pull dynamic of ‘up the stairs, down the elevator.’
That can largely be drawn back to positioning, as a crowded trade sees incremental gains on the way up, with buyers testing and testing as each fresh high prints; while the exit door brings a furious retracement driven by the prospect of change. In 2022, 2023 and 2024, that change was in the form of weakening inflation hitting Fed rate hike and then rate cut expectations. More recently, since July, that’s been due to a dual intervention from the U.S. and Japan.
But, as I pointed out after that first intervention run, when prices were pushing towards the 155.00 level, there was still motive for longs and through the month of August, that’s what showed up as buyers pushed all the way back to the 160.00 level. Another swing developed shortly after that and this time, prices pushed down to the 153 level. And, again, buyers loaded up and prices ran for 600 pips until last week’s test and stall at the 159.00 level.
USD/JPY Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY Shorter-Term
Last week saw both the US and Japan comment on Japanese spot rates, which was one of the factors behind the 250+ pip retracement. And while both would surely like a lower spot rate, that’s been the case for the past two months and perhaps the larger question is whether there’s enough fear of change in the environment to compel longer-term bulls to pare positions.
After all, this was what was behind retracements in 2022, 2023 and 2024 – as weakening CPI drove the fear that the Fed would go less hawkish and then, eventually dovish into a rate cut. We haven’t quite had that situation of late as US inflation is expected to come in at 3.5% tomorrow, which still outpaces inflation in Japan.
There could be another factor, however, as Japan is more vulnerable to surging oil prices as they’re forced to import all of their oil, and a sliding Yen to go along with higher oil prices makes that threat of future inflation an even larger factor.
For tomorrow, however, the focus is much more to the point, as Core PCE in the United States will likely have some form of direct relationship on the pair, with stronger inflation leading to higher odds of more US rate hikes, which further exposes that deviation between the US and Japan.
At this point, USD/JPY is holding support at a key zone, the same 156.68 that was in-play late last week synced up to 157.22. From the daily above, this has an open door for bullish continuation. But – for those that are bearish there could be a justification that I’ll look at a little lower.
USD/JPY Four-Hour Price Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY Shorter-Term
At this point there’s a head and shoulders formation that’s set up on shorter-term charts. This would require a break of last week’s low to trigger, and if it does, that projects to a move of approximately 250 pips, which would point to around the 154 level on the pair.
USD/JPY Two-Hour Chart
Chart prepared by James Stanley; data derived from Tradingview
--- written by James Stanley, Senior Market Analyst, Global Macro
