Against the backdrop of recent months, the USDJPY pair is beginning to look increasingly weaker, both technically and fundamentally. After a series of rises to near historic highs, investors are increasingly questioning the sense of maintaining long positions in the dollar financed by cheap yen. The Bank of Japan has signalled an exit from its ultra-loose policy, raised interest rates and suggested a readiness for further normalisation, which narrows the yield differential with the US and raises the cost of financing the classic yen carry trade. At the same time, there is a growing belief that the Fed will enter a full-fledged cycle of rate cuts in 2026, which undermines the attractiveness of the dollar as a high-yield currency and fits into the broader political narrative of the Trump administration, which, willy-nilly, is weakening the USD.
As a result, the market, which until recently was eagerly testing record highs on USDJPY, is now increasingly “moving away from longs” – this can be seen in the more rapid pullbacks after each dovish surprise from the US and the acceleration of declines when good data comes out of Japan. There is also increasing talk that the long-standing yen carry trade has become a ticking time bomb: each successive signal of tightening from the BoJ and simultaneous pressure for cuts in the US increases the risk of an avalanche of position closing and accelerated yen appreciation. It is this combination – a politically “weakened” dollar and a slowly “thawing” yen – that means the USDJPY pair is no longer a clear-cut growth story and, from a 2026 perspective, increasingly looks like a candidate for a deeper correction. However, for this to happen, the BoJ must keep its promises of interest rate hikes, and this may be hampered by the Japanese Prime Minister’s ultra-loose economic policy. Today, the pair may experience increased volatility around 14:30, when US NFP data will be released.
Looking at the yen from a technical perspective, we can see that the USDJPY pair is once again testing the 200-day EMA, which not only can be considered the main barrier to the ongoing upward trend in the pair, but has also recently halted sharp declines. The final reaction to this level may determine the trend the pair will follow in the coming weeks.
Source: xStation
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