Japanese Yen Outlook: USD/JPY Holding Critical Support for Now

USD/JPY, Japanese Yen Talking Points:

• With USD breaking out in a big way last week, setting a fresh two-year high, USD/JPY has lagged as last week saw a lower-high print.
• Next month brings the policy review from the Bank of Japan and questions abound about whether that’ll bring a more-hawkish tilt from the BoJ in 2025 trade.

USD/JPY hasn’t been heavily in the headlines of late and that’s likely to the joy of the Bank of Japan. The summer sell-off that saw USD/JPY shed more than 2,000 pips in less than a month was accused of driving sell-offs in global equities, which helped to lead to the VIX spike to its third-highest level ever, rivaling only the Financial Collapse in 2008 and Covid in 2020.

After showing a bit of comfort above the 160.00 handle in July, the pair hurriedly snapped back on a busy Thursday morning, with US CPI coming in below-expectation which gave hope that the Fed would move into rate cuts this year; and that was followed by another Bank of Japan intervention after the prior attempt to hold USD/JPY below 160.00 had failed.

But that was a ‘be careful what you ask for’ situation as the pair soon went into free fall and continued to decline until, eventually, the 140.00 level came in as support in September.

Perhaps ironically the false breakdown at 140.00 showed the week of the first FOMC rate cut; and that announcement led to a higher-low in the pair and by the end of the month, USD/JPY had broken-out from a falling wedge formation as recovery themes began to take-over. The bullish trend in USD/JPY then ran for all of October and the first half-of November, retracing 76.4% of the July-August sell-off.

USD/JPY Daily Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

USD/JPY Post-Election

With the US Dollar rally taking-hold after the US Presidential Election, USD/JPY similarly trended higher, at least initially. The 76.4% Fibonacci retracement of the July-August sell-off came in two weeks ago to hold the highs, and that led to a fast pullback to the 61.8% retracement of the same major move which, so far, has held support.

But notably, as the USD breakout continued last week USD/JPY didn’t participate much and the pair put in a lower-high even as EUR/USD and GBP/USD were breaking down to go along with that US Dollar strength.

At this point we can’t quite say that the pair is bearish, however, as USD/JPY is holding above a couple of critical supports. The first would be that 61.8% retracement, which is also a spot of prior resistance. And below that, we have the 151.95 level which is currently confluent with the 200-day moving average. That price is a big deal in the pair as this was the spot that caught the lows in early-May, after the BoJ’s failed attempt to defend 160.00, and this was also the price that set the high in Q4 of 2022 and 2023.

Below that, we have the 50% mark of the July-August sell-off and given that USD/JPY has interacted with the 76.4 and 61.8% retracements, that level remains key, as well. And even below that we have the 150.00 level, which is a major psychological level that’s played a role in the pair’s price action over the past couple years.

So there is a wide swath of support sitting below price and until sellers make an attempt at taking that out, reversal scenarios may not be quite so attractive. But, on a shorter-term basis there may be something of interest to that effect.

USD/JPY Daily Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

USD/JPY Shorter-Term

From the four-hour chart below, we can see USD/JPY working into a shorter-term descending triangle formation. I’ve linked the 153.41 Fibonacci level up to a prior price action swing-high at 153.75 to make a support zone and price currently sits atop that zone.

But last week’s bounce led to a lower-high even as the US Dollar spiked up to a fresh two-year high and that divergence is notable.

In bearish breakdown scenarios, the next spot of emphasis is that same 151.95 level that’s been in-play for the past couple of years. If bears can break through that, then there would be a greater sign of attempted control and that’s something that can start to lend itself to bigger-picture bearish scenarios for USD/JPY.

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

--- written by James Stanley, Senior Strategist