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USD/JPY Analysis: Bearish Outlook Amid Weakening Fundamentals and Sentiment Shift

USD/JPY Analysis: Bearish Outlook Amid Weakening Fundamentals and Sentiment Shift

USD/JPY

The USD/JPY pair is facing increasing downside pressure as macroeconomic fundamentals, technical signals, and sentiment align towards a bearish outlook. While the Federal Reserve’s hawkish stance has supported the U.S. dollar, growing speculation about a potential shift in Bank of Japan (BoJ) policy could strengthen the yen. Market sentiment is also turning against the pair, with a majority of traders holding short positions. Technical indicators suggest that key resistance at 155.2 remains a major hurdle, and a break below recent support could accelerate a move lower.

Fundamental Analysis

The key driver of USD/JPY remains monetary policy divergence between the Federal Reserve and the Bank of Japan. The Fed has maintained high interest rates, keeping the USD attractive, while the BoJ is still cautious about tightening policy despite inflationary pressures. However, there is growing dissent among BoJ policymakers, with some advocating for a rate hike as early as Q1 2025, which would boost the JPY.

The U.S. economy remains strong, with robust GDP growth and a resilient labour market, further supporting the dollar. In contrast, Japan’s economic growth has been sluggish, struggling with inflation sustainability and stagnant wages. Trade deficits continue to weigh on the yen, as Japan’s heavy reliance on imports increases costs. However, speculation of BoJ intervention or a policy shift could reverse this yen weakness.

A major risk for USD/JPY is whether the BoJ will signal a definitive move away from its ultra-loose policy, which could lead to renewed JPY strength. If a shift towards higher rates in Japan is confirmed, the yen could appreciate significantly, driving USD/JPY lower.

Technical Analysis

Multi-timeframe analysis confirms a weakening bullish trend, with increasing downside risk.

On the 4-hour chart (H4), USD/JPY is struggling to break above 155.2, hovering near the Ichimoku Cloud, indicating indecision. The RSI at 53.32 is neutral, showing limited upside momentum, while MACD is attempting a bullish crossover, but momentum remains weak.

On the daily chart (D1), USD/JPY is testing 155.2, which aligns with the Conversion Line (155.234). A decisive break below this level would expose 153.7, the bottom of the Ichimoku Cloud. The MACD remains bearish, confirming downward momentum.

The weekly chart (W1) shows that while the long-term trend is still bullish, the RSI at 54.91 is declining, signaling weakening momentum. The Ichimoku Cloud support at 153.7 is a key level to watch. A break below this level could trigger a deeper correction towards 150.7, a major support zone.

Link To Price Chart: https://www.tradingview.com/x/vLNGGJgE/

Sentiment Analysis

Market sentiment is turning increasingly bearish, reinforcing the downside potential for USD/JPY. Data shows that 62% of traders are holding short positions, indicating broad expectations of a decline. IG client sentiment also reveals that 66% of traders are short, supporting a bearish outlook. The potential for BoJ policy tightening in early 2025 is adding pressure on USD/JPY, increasing JPY demand.

Given the technical weakness and shifting sentiment towards JPY appreciation, a short position on USD/JPY is the most favourable setup.

Trade Setup: Short USD/JPY

Entry Price: 155.2 (key resistance level)
Stop Loss: 156.3 (above Ichimoku Cloud and recent highs)
Take Profit: 153.7 (Ichimoku Cloud bottom)
Extended Target: 150.7 (weekly support level)

The trade setup is based on USD/JPY struggling to sustain bullish momentum, with price action showing resistance at 155.2. Bearish momentum is further confirmed by RSI, MACD, and sentiment indicators, suggesting a strong likelihood of a downward move. If the price falls below 155.2, a test of 153.7 is expected, and a break below this level could trigger an extended decline toward 150.7.

Traders should closely monitor Bank of Japan policy statements and U.S. economic data, as they will be key drivers of further price action. If the BoJ signals a rate hike, JPY strength could accelerate the USD/JPY decline. The current outlook remains bearish, with a move toward 153.7 and potentially 150.7 in the near term.

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