Intertwined Rate Hike Expectations and Carry Trade Unwinding Risks

Jason

Forex

Summary:

Market expectations for the Yen have shifted from a pure "intervention trade" to substantial pricing in of rate hikes.

BUY USDJPY

EXP

PENDING

152.208

Entry Price

155.650

149.818

153.343 -0.643 -0.42%

Pips

PENDING

149.818

Exit Price

152.208

Entry Price

155.650

Fundamentals

Following sharp fluctuations, USD/JPY pulled back to hover near the 155 level. The main market narrative has pivoted from a pure "intervention trade" toward substantial pricing in of a Bank of Japan (BOJ) rate hike in September. The core driver behind the Yen's recent strong rebound lies in a marked improvement in Japanese domestic economic data. Real wages in Japan grew 2.4% year-on-year in July, marking the largest increase since May 2021 and the seventh consecutive month of growth, providing solid ground for the BOJ to further tighten monetary policy. Meanwhile, Japan's annualized Q2 GDP growth was revised up to 1.4%, underscoring enhanced economic resilience. With the services PMI rising to a five-month high, strengthening domestic demand has further bolstered market expectations for a 25 bps rate hike at the BOJ's September 17–18 meeting, with market-implied probabilities reaching as high as 98%.

In the United States, macroeconomic data presents a mixed picture, amplifying currency market volatility. Although the 30-year US Treasury yield approached 5.3%, reflecting lingering long-end yield pressures, Fed Governor Christopher Waller delivered dovish remarks, stating he would support keeping rates unchanged in September if inflation cools. Consequently, market expectations for a September Fed rate hike were scaled back to roughly 48%. Market focus this week centers on Thursday's US PPI release alongside Friday's CPI and Non-Farm Payrolls reports, which will serve as the final determinants for the Fed's policy trajectory. Hotter-than-expected inflation metrics could lend support to the greenback; conversely, soft data could prolong dollar weakness.

Notably, transit restrictions in the Strait of Hormuz have driven energy prices higher, elevating global inflationary pressures. While this places strain on Japan’s import-reliant economy, it also adds complexity to any potential joint currency intervention by the US and Japan.

Technical Analysis

On the daily chart, USD/JPY has broken below its former ascending channel and the base of its long-term consolidation range, accelerating lower in a breakdown phase as it approaches previous swing low support. Key downside support rests near the previous low at 152.618; a breakdown below this level would trigger a new leg lower toward 151.188 and lower. Key upside resistance stands at 156.637, representing a confluence of the former consolidation floor and the Ichimoku Kijun-sen. While USD/JPY has forcefully breached the ascending channel's lower boundary and the bottom of the cloud, whether it can establish support and rebound near the critical 152.618 level warrants close observation.

Indicators-wise, within the Ichimoku Kinko Hyo system, the Tenkan-sen (red line: 158.4340) and Kijun-sen (blue line: 156.6370) display a distinct downward divergence. The spot price (153.618) trades well below both lines and is accelerating downward beneath the cloud, signaling extremely potent bearish momentum. Although price action is stretched from the moving averages—suggesting technical oversold condition and rebound potential—the steepness of the decline indicates USD/JPY may further test the 152.618 support before initiating a technical bounce.

On the ADX indicator, the ADX line (green line: 32.75) is ticking sharply upward, while +DI and -DI are diverging rapidly. With -DI (blue line: 28.33) surging well above +DI (red line: 7.68), the indicator confirms that bearish momentum is intensifying following the breakdown below key technical support. Intertwined Rate Hike Expectations and Carry Trade Unwinding Risks_1

Intertwined Rate Hike Expectations and Carry Trade Unwinding Risks_1

Trading Recommendations

Direction: Long

Entry: 152.208

Take Profit: 155.650

Stop Loss: 149.818

Support: 152.618 / 151.188 / 149.758

Resistance: 155.478 / 156.637 / 158.434

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