USDJPY: Navigating Technical Downtrend Amid Rate Gap Pressures

The USDJPY has been in a downtrend since peaking at 161.941 on July 3, driven by technical factors like a failure swing reversal and a bearish EMA crossover. After reaching a low of 139.568 on September 16, signs of a potential upward correction emerged, but prices remained below the 50-period EMA, signaling a mixed outlook. Key resistance levels include 147.199 and 161.941, while support levels start at 142.625. The US dollar’s broader weakness, driven by potential Fed rate cuts and a 5.00% to 0.25% US-Japan rate gap, continues to pressure the yen.

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The USDJPY pair has been in a downward trend since peaking at 161.941 on July 3. The decline was largely due to technical factors that reinforced bearish momentum. A notable failure swing reversal occurred when the high of 161.798 couldn’t exceed the prior peak, followed by a drop below 160.254, confirming the trend shift. Moreover, the 20-period and 50-period Exponential Moving Averages (EMA) formed a double crossover, adding to the selling pressure.

However, after hitting a low of 139.568 on September 16, market conditions began signaling a potential upward correction. The price broke above the 20-period EMA, the Momentum oscillator moved past the 100 line, and the Relative Strength Index (RSI) climbed above 50. Despite these positive signals, prices remain under the 50-period EMA, suggesting a mixed outlook that requires careful observation.

Should the buyers take market control, traders may direct their attention toward the four potential resistance levels below:
147.199: The initial resistance is set at 147.199, which corresponds to the swing high marked on September 3.
149.378: The second price objective is projected at 149.378, corresponding to the high point from August 15.
155.209: The third price target is established at 155.209, aligning with an internal trendline.
161.941: An additional price target is seen at 161.941, representing a daily high from July 3.

Should the sellers maintain market control, traders may consider the four potential support levels listed below:
142.625: The initial support level is identified at 142.625, corresponding to the weekly Pivot Point estimated using the standard methodology.
139.568: The second support level is seen at 139.568, representing a daily low from September 16.
137.620: The third support level is positioned at 137.620, reflecting the 261.8% Fibonacci Extension drawn from the swing low of 143.425 to the swing high of 147.199.
135.848: An additional downside target is noted at 135.848, corresponding to the weekly support (S3) calculated using the standard methodology.

The US dollar is on the brink of erasing its 2024 gains as market sentiment shifts toward expectations of more aggressive rate cuts by the Federal Reserve. The US dollar index has hovered near its lowest levels since January, with futures markets now pricing at a 50% probability of a half-point rate cut in November. Additionally, the dollar has weakened significantly against major currencies such as the euro, yen, and pound, reflecting growing uncertainty around the Fed’s monetary policy trajectory and its potential impact on the greenback.

The yen weakened to 145.000 against the dollar, its lowest since early September, despite the narrowing yield gap between Japan and the US. With the US interest rate at 5.00% and Japan’s at just 0.25%, the stark difference continues to pressure the yen. While the Federal Reserve signals caution on further rate cuts, the Bank of Japan remains hesitant to raise rates, contributing to the yen’s depreciation. Traders are also closely watching Japan’s upcoming ruling party leadership election, which could influence future monetary policy and impact the yen’s trajectory.

In conclusion, the USDJPY has been in a sustained downtrend, with mixed technical signals suggesting potential for an upward correction. Key resistance and support levels indicate critical price points to watch. Meanwhile, broader fundamentals such as the US-Japan interest rate gap, potential Fed rate cuts, and ongoing yen weakness due to the Bank of Japan’s cautious stance highlight the complex forces shaping the currency pair’s future movements. Traders should remain vigilant as both economic events and policy shifts could further influence market direction.