The USDJPY Downtrend and the JPY Carry Trade Unwind

The USDJPY pair has experienced a sharp reversal, marking a pivotal shift in its trajectory. Following a peak in early July, the pair has entered a pronounced downtrend, underscored by technical indicators and bearish patterns that suggest a deepening decline. As market participants navigate this landscape, critical resistance and support levels emerge, framing the potential paths ahead. The broader context is influenced by unexpected policy shifts from the Bank of Japan and the Fed’s interest rate decision, which have upended prevailing trends and injected fresh uncertainty into the market dynamics.

Key Economic Events

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The USDJPY pair has been on a downtrend since July 11, when it reached a daily high of 161.944. After that, prices formed a bearish reversal pattern known as a failure swing in technical analysis. Specifically, the peak at 161.271 failed to exceed the previous peak, and prices dropped below the trough of 160.256, indicating a failure swing. During this time, prices formed consecutive lower peaks and lower troughs, indicating a downtrend. Additionally, on July 26, the price fell below both the 20 and 50-period Exponential Moving Average (EMA), forming a strong bearish signal known as the “Death Cross.” Furthermore, the Momentum oscillator dropped below the 100 baseline, supporting the bearish bias of the USDJPY pair’s direction. On a closer look, the Relative Strength Index crossed above the oversold zone, signaling a potential rally to the upside.

Should the buyers take market control, traders may direct their attention toward the four potential resistance levels below:

149.366: The first price target is set at 149.366, reflecting the 38.2% Fibonacci Retracement between the swing high of 161.944 and the corresponding swing low of 141.680.

151.752: The second target is identified at 151.752, representing the 50% retracement between the swing high of 161.944 and the swing low of 141.680.

154.169: The third price target is established at 154.169, which corresponds to the 61.8% Fibonacci Retracement between the swing high of 161.944 and the corresponding swing low of 141.680.

161.944: An additional resistance is seen at 161.944, aligning with a peak formed on July 3.

Should the sellers keep market control, traders may consider the four potential support levels listed below:

145.329: The primary downside target is identified at 145.329, which corresponds to the Pivot Point calculated using the weekly standard method.

141.680: The second support level is 141.680, representing the swing low marked on August 5.

139.169: The third support line is established at 139.169, representing the (S2) support estimated using the weekly Pivot Points method.

136.993: An additional downward target is observed at 136.993, computed as the 161.8% Fibonacci Extension between the low point, 141.680, and the high point, 149.384

The exchange rate between the US Dollar and the Japanese Yen has dropped by more than 12% since the start of July. This decline was unexpected and was caused by the Bank of Japan’s surprising decision to raise interest rates. The bank’s move involved increasing interest rates and reducing bond purchases, which startled the market. In recent years, Japan’s low interest rates have made the Yen a popular choice for carry traders. However, following the rate hike at the end of July, this trend is reversing as investors are expecting more rate hikes and potential intervention by authorities.

In conclusion, the USDJPY pair’s recent trajectory highlights the complex interplay of technical signals and shifting economic policies. The sharp reversal observed since July reflects not only a bearish momentum but also the broader uncertainties introduced by significant policy changes from central banks. As traders navigate the evolving landscape, the identified resistance and support levels will serve as critical markers for potential market movements. With key economic events on the horizon, the direction of the USDJPY pair remains poised at a crossroads, where market sentiment and macroeconomic factors will determine its next phase.