USD/JPY: Bulls on the Ropes as Market Headwinds Strengthen

• USD/JPY losing bullish momentum as key technical levels give way
• Bearish signals strengthen, with RSI and MACD trending lower
• Hawkish US rates reprising, elevated US asset valuations create asymmetric downside risks
• Key US and Japan data ahead, setting up potential volatility

Summary

The bullish technical picture for USD/JPY is eroding rapidly, with the pair trading through the 50-day moving average and the long-running uptrend dating back to September in early trade on Thursday. With price and momentum trending lower, the risk of a meaningful downside move is growing. With a busy calendar in the United States and Japan to end the week, there is no shortage of potential catalysts that could spark a decisive break.

USD/JPY Picture Shifting Bearish

USD/JPY simply looks heavy on the daily chart, fatigued after a substantial rebound from when the Federal Reserve kicked off its rate-cutting cycle in September. The pair sits in what resembles a falling wedge, but instead of looking like it will break to the topside as convention would suggest, the price action hints that directional risks may be skewing lower.

Source: TradingView

For now, the wedge structure in USD/JPY remains intact, but the price has been trending lower for weeks. RSI (14) and MACD are following suit, providing a bearish signal on momentum. While the bearish breakout attempt sparked by the DeepSeek drawdown failed earlier this week, that may not be enough to discourage bears from having another crack. 

A successful bearish break would put horizontal support at 153.38 on the radar. It has acted as both support and resistance since early November, making the price action around it important. The 200DMA is only around 50 pips lower, another level the pair has respected on multiple occasions over the past year. Beyond that, there is little major visible support until the December 3 swing low of 148.65.

Asymmetric Fundamental Risks?

Assessing the setup from a fundamental perspective, two of the major forces that have driven USD/JPY upside in recent years—ballooning interest rate differentials and significant gains in riskier assets fuelled by yen carry trades—are both looking increasingly mature.

Source: TradingView

The US rate outlook has already undergone a significant hawkish recalibration since September, and asset valuations—including in the US tech sector—are now arguably priced for perfection. Directionally, it is not difficult to make a near to medium-term case for risks being asymmetrically skewed lower, given the moves already seen.

Risk Laden Environment Awaits

While the main risk event of the week—the Fed interest rate decision—is now in the rearview mirror, several risk events remain over the next 36 hours that could challenge the US economic exceptionalism narrative, potentially shaking things up for USD/JPY.

Source: Refinitiv

The calendar is laden with top-tier releases, including in Japan. The events that carry the greatest risk of sparking volatility are highlighted. Growth, household spending, wages, and inflation are incredibly important, directly influencing labour market trends which policymakers are watching like a hawk. On the US side of the equation, any sign of weakening amplifies the risk of USD/JPY downside.

Across the Pacific, an upside inflation surprise from Tokyo inflation would increase the risk of the Bank of Japan adding to last week’s rate hike in the first half of the calendar year, placing pressure on carry trades underpinned by yen borrowing costs remaining low. 

Given the technical and fundamental picture, USD/JPY bulls may have a tough task regaining the ascendency. The threat of large-scale tariffs from the Trump administration has—until now—managed to limit dollar downside. But if they are so large that they spark market panic, the opposite could easily play out.

-- Written by David Scutt

Follow David on Twitter @scutty

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