Is the Yen's Rally About to End? USD/JPY Long

Bloomberg reported on cfd TraderFriday, July 26th, that the yen has surged about 5% against the dollar since July 11th, with suspected intervention by Japan amplifying this rise. However, Bloomberg believes this yen rally could burst as soon as next week.

(Screenshot source: Bloomberg)

The report points out that in recent weeks, investors have been buying the yen, betting that interest rates will eventually tilt in favor of Japan. However, next Wednesday will be a critical moment. Whether this yen surge marks the beginning of a major reversal will depend on the interest rate decisions from the Bank of Japan and the Federal Reserve.

The swap market shows a 41% chance that the Bank of Japan will raise rates by 15 basis points at the conclusion of its July 31st policy meeting, indicating very cautious market sentiment. Among Bank of Japan watchers surveyed by Bloomberg, only 30% expect a rate hike, though over 90% see a risk of it happening.

This makes yen bulls vulnerable, especially if expectations for reduced bond purchases by the Bank of Japan are unmet or if the Federal Reserve diminishes hopes for rate cuts in the coming months.

Here are views from other institutions and some former Bank of Japan officials:

- Nick Twidale, ATFX Global Markets Analyst: The Bank of Japan might disappoint by not tightening policy as expected. If the Bank's actions let down the market, carry trades could revive, weakening the yen.

- BlackRock and some former Bank of Japan officials: The Bank of Japan is likely to keep rates unchanged. Despite a rebound in services data in July, weak manufacturing and consumer spending complicate the Bank's decision.

- Amir Anvarzadeh, Asymmetric Advisors Strategist: If the Bank of Japan does nothing, USD/JPY could surge again.

- Rodrigo Catril, National Australia Bank Strategist: If the Bank of Japan "fails to fully deliver," the yen could drop to 158 per dollar.

USD/JPY Price Analysis: Long-Term Trend Reversal Risk

USD/JPY has weakened over the past three weeks, hitting key chart support around 151.80, coinciding with the highs of October 2022 and October 2023.

USD/JPY Weekly Chart

The long-term trend remains bullish, suggesting a higher probability of a rebound. However, price action shows no signs of this yet. USD/JPY continues to fall, and if this week ends with a long red candle (already halfway through Thursday), the weekly chart will form a bearish "Three Black Crows" candlestick pattern.

The current support level is crucial, serving as a crossroads for prices. A rebound from here could indicate the resumption of the long-term uptrend. Conversely, a break below this support would question the long-term uptrend.

Moreover, if the 50-week simple moving average is breached decisively, along with a break below the major uptrend line around 149.50, it would confirm a long-term trend reversal. Post-break targets would be 141.60 and then 136.85.

A decisive break means USD/JPY clearly falls below the trendline, closes near the lows with a long red candle, or shows three consecutive red candles.

To be confident in the resumption of the long-term uptrend, a bullish reversal pattern needs to form at the current level. Examples include a Japanese hammer or a two-bar reversal, indicating a potential rise towards the 161.95 high (June 28) or even new highs.

(Note: This article is intended to share market news and commentary, and does not constitute any investment advice.)

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