The USD/JPY currency pair has experienced a notable decline recently, with current trading levels hovering around 151.95. Analysts from OCBC, Frances Cheung and Christopher Wong, attribute this drop to a broader pullback in the US Dollar, primarily linked to the unwinding of the so-called “Trump trade.” As uncertainties surrounding the upcoming US presidential election grow, market sentiment is shifting, leading to renewed strength in the Japanese Yen (JPY).
Analyzing the Technical Landscape
Technical indicators suggest that the bullish momentum seen in the USD/JPY pair has begun to wane. The Relative Strength Index (RSI) has fallen from near overbought levels, indicating a potential reversal in the short term. Current support levels are established at 151.55, which aligns with the 200-day moving average (DMA), while more significant support can be found at the 50% Fibonacci retracement level of the July high to September low, around 150.60 to 150.70.
On the upside, resistance levels are identified at 153.30 (61.8% Fibonacci retracement), with additional resistance at 155 and 156.50 (76.4% Fibonacci retracement). Given these dynamics, OCBC advises maintaining short positions in USD/JPY as further pullbacks are anticipated in the near term.
A Hawkish Turn from the Bank of Japan
The tone from the Bank of Japan (BoJ) has shifted recently, particularly with Governor Kazuo Ueda indicating a more hawkish stance than previously expected. Ueda emphasized that the current political climate in Japan would not hinder his willingness to raise interest rates if inflation and economic conditions align with the bank’s forecasts. This shift suggests that the BoJ is preparing to normalize monetary policy, with a potential rate hike on the horizon in December—a viewpoint that OCBC endorses.
Recent labor market reports further bolster this outlook, highlighting upward wage pressure in Japan. Key indicators show:
- The unemployment rate has eased, signaling a tightening labor market.
- The job-to-applicant ratio has increased to 1.24, indicating more available positions than applicants.
- The female labor participation rate has risen by 1.2 percentage points compared to the previous year.
In light of these developments, Japan’s trade union confederation (Rengo) is advocating for wage increases of 5% or more across the board, and upwards of 6% for small and medium-sized enterprises (SMEs) for 2025. Such wage growth, coupled with broadening services inflation, provides a favorable backdrop for the BoJ to consider rate normalization.
Also read : USD/JPY Technical Analysis- Support At 151.50 And Resistance At 152.50 In Focus
Outlook for the Yen
As the JPY continues to regain strength, it is poised to benefit from both domestic economic factors and global market sentiments. The potential for a rate hike from the BoJ, combined with a more volatile USD environment, could position the Yen favorably against its US counterpart.
Investors should remain vigilant as they navigate these changing dynamics. The potential for further pullbacks in USD/JPY remains strong, and maintaining a short position could be a prudent strategy in this evolving landscape. As we approach critical economic events, the interplay between US politics and Japanese monetary policy will undoubtedly shape the future trajectory of the USD/JPY pair.
In summary, the current market conditions suggest a cautious approach towards the USD, with increasing confidence in the JPY as economic indicators point toward a strengthening currency backed by the BoJ’s potential policy shifts. As the situation develops, traders should closely monitor both technical levels and macroeconomic signals to inform their strategies effectively.
