The USD/JPY pair remains fundamentally supported by strong interest rate differentials and robust US economic growth. However, recent price action highlights short-term technical risks. In this article, we explore why traders should remain bullish over the medium term but cautious about immediate entries.

Fundamental Analysis

The United States maintains a clear advantage over Japan on key macroeconomic measures:

• GDP Growth: US GDP growth stands at 2.4%, well above Japan’s modest 0.6%.
• Inflation: US inflation is moderate at 2.8% year-on-year, while Japan’s inflation is slightly higher at 3.7%, though structural deflationary tendencies persist in Japan.
• Labour Market: US unemployment remains historically low at 4.2%, while Japan’s unemployment rate is even lower at 2.4%, reflecting a tight labour market in both economies.
• Monetary Policy: The Federal Reserve’s interest rate is held at 4.5%, compared to the Bank of Japan’s ultra-loose 0.5%. This vast 4% yield differential remains a key driver for USD/JPY strength.

Additional structural factors include:

• Current Account: Japan has a strong surplus (4.7% of GDP) compared to the US’s deficit (-3.9%), but capital flows favour the dollar due to higher yields.
• Business Confidence: US business confidence is much stronger at 49 points, compared to Japan’s 12 points, indicating better economic sentiment in the United States.

Overall, US fundamentals remain superior, with high real yields and robust growth favouring continued dollar strength over the yen.

Sentiment Analysis

The latest Commitments of Traders (COT) data reveals that large speculators are net long USD and net short JPY, reinforcing the fundamental picture.

Additional sentiment drivers include:

• Yield differentials continue to dominate FX flows, keeping the dollar in demand.
• The Bank of Japan’s reluctance to tighten policy meaningfully despite rising inflation is leading to persistent selling pressure on the yen.
• Risk appetite globally remains moderately cautious, but in FX markets, high-yielding currencies like the USD are favoured over low-yielding safe havens like the JPY.

Market sentiment thus remains strongly in favour of USD/JPY upside, though recent volatility signals the need for tactical caution.

Technical Analysis

The daily chart for USD/JPY reveals a different picture from the fundamentals:

• Ichimoku Cloud: Price is currently below the Kumo, indicating a bearish technical structure.
• Conversion and Base Lines: The Conversion Line is below the Base Line, confirming the bearish trend.
• RSI: RSI stands at 41.58, in bearish territory and pointing lower, suggesting momentum remains weak.
• MACD: The MACD line is negative and diverging further from the signal line, with the histogram expanding on the downside.
• Candlestick Price Action: Recent daily candles show consistent lower highs and lower lows, with no bullish reversal patterns evident yet.

Volume analysis also points towards persistent bearish pressure without any signs of accumulation yet.

Conclusion

While USD/JPY is fundamentally and sentimentally supported for further upside over the medium term, the short-term technical outlook remains bearish.

Traders should remain cautious about immediate long positions until a clear technical reversal emerges. A bullish signal such as a break back above the Ichimoku Cloud or a bullish crossover on the MACD would confirm the next phase higher.

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