The economic and policy divergence between the United States and Japan is becoming increasingly clear, setting the stage for a potential rise in USD/JPY.

Fundamental Analysis

The United States continues to display economic resilience, even as global growth concerns persist.
GDP growth for the latest quarter stands at 2.4 percent, with annual growth at 2.5 percent. The labour market remains healthy with an unemployment rate of 4.2 percent, while retail sales have risen strongly by 1.4 percent month-on-month. Inflation, although easing to 2.4 percent year-on-year, remains sticky enough for the Federal Reserve to maintain a cautious monetary stance.

The Federal Reserve has signalled that interest rates will remain higher for longer, with no immediate rush to cut rates. This positions the US dollar favourably against lower-yielding currencies.

In contrast, Japan’s economy remains subdued.
GDP growth is weak at 0.6 percent, and although inflation has picked up to 3.6 percent year-on-year, the Bank of Japan has been extremely slow in normalising monetary policy. Interest rates remain ultra-low at just 0.5 percent, and forward guidance from the Bank of Japan suggests that any further tightening will be minimal and gradual.

The large and sustained interest rate differential between US and Japanese assets continues to drive strong capital outflows from Japan, supporting USD/JPY appreciation.

Technical Analysis

On the daily chart, USD/JPY remains technically bearish but is showing early signs of a potential bottom.

Price is currently below the Ichimoku Cloud, maintaining a bearish structure. However, there is emerging bullish divergence on the RSI, which stands at 39.01 and is making higher lows even as price action tests support levels.
The MACD is flattening and the histogram is turning positive, indicating a possible shift in momentum.

The Tenkan-Sen (Conversion Line) at 141.959 is the immediate resistance. A daily close above this level would confirm the start of a technical rebound towards higher resistance zones, potentially towards the cloud.

Volume analysis suggests that the recent downside move was accompanied by capitulation selling, often a precursor to trend reversals.

Candlestick formations show stabilisation, with small-bodied candles and lower wicks near current support levels around 141.95.

Sentiment Analysis

Market sentiment remains supportive of USD strength against JPY.

The latest Commitments of Traders data show heavy net short positioning in the Japanese yen, consistent with expectations that the BoJ will not significantly tighten policy.
Meanwhile, the US dollar maintains strong speculative support due to its yield advantage and resilient economy.

Options markets reflect a premium for USD/JPY upside, with risk reversals showing a slight bias toward USD gains.

Global risk sentiment has turned moderately positive, reducing demand for traditional safe-haven currencies like the yen and making high-yielding currencies like the dollar more attractive.

Conclusion

The USD/JPY pair is positioned for a potential move higher, supported by strong fundamental and sentiment factors.
The economic and policy divergence between the United States and Japan remains wide, and capital flows continue to favour the US dollar.

Technically, early signs of stabilisation are emerging. A confirmed daily close above 141.959 would likely signal a shift back towards bullish momentum.

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