USD/JPY Breakdown Imminent? Bearish Chart Pattern Aligns with BoJ Optimism

Traders' Opinions

Economic

Summary:

The Japanese Yen extends gains amid rising expectations of further Bank of Japan rate hikes in 2025 and optimism over a potential US-Japan trade pact.

SELL USDJPY

Close Time

CLOSED

144.500

Entry Price

141.000

147.000

157.205 +0.181 +0.12%

84.4

Pips

Profit

141.000

143.656

Exit Price

144.500

Entry Price

147.000

The Japanese Yen (JPY) continued its ascent on Tuesday, reaching near two-week highs against the US Dollar (USD) as investors increasingly price in the likelihood of further Bank of Japan (BoJ) rate hikes in 2025. This comes amid a backdrop of widening monetary policy divergence between Tokyo and Washington and a cautious reappraisal of global risk, with developments ranging from easing US-China tensions to renewed Middle East and Eastern European geopolitical instability.

The JPY’s upward momentum gained traction during the early European session, with USD/JPY retreating steadily as traders digested a confluence of supportive macro and geopolitical factors. Despite a broadly improved risk tone globally, the Yen remains well bid — a testament to growing expectations that Japan’s monetary policy is entering a normalization phase after years of ultra-accommodation.

The core catalyst fueling the Yen’s strength lies in increasingly hawkish rhetoric from the Bank of Japan. On Monday, BoJ Deputy Governor Shinichi Uchida indicated that inflation in Japan may re-accelerate following a temporary lull, reinforcing the case for further rate increases — a rare and significant pivot for a central bank long known for its dovish bias. Uchida emphasized that should price trends and economic activity unfold as expected, the BoJ "will act accordingly" to tighten policy.

This view was echoed in the BoJ’s latest Summary of Opinions, which highlighted a notable shift in internal policy discourse. Some board members reportedly see room to resume hikes, particularly if global uncertainty — including the disruptive influence of US tariffs — begins to recede.

Such forward-looking policy signals are pulling the Yen out of its traditional safe-haven silo and repositioning it as a yield-sensitive currency for the first time in over a decade.

Supporting the JPY further is renewed optimism surrounding US-Japan trade relations. Market chatter around a potential bilateral agreement has buoyed sentiment, even as concrete details remain scarce. Japan's Finance Minister Katsunobu Kato confirmed that FX coordination talks were scheduled on the sidelines of the G7 finance ministers' summit. However, with reports suggesting US Treasury Secretary Bessent may skip the meeting, expectations are tempered.

Nonetheless, the positive tone reinforces the market’s current inclination to favor the Yen over the Dollar — a sentiment rooted more deeply in monetary policy divergences than in day-to-day geopolitical developments.

While the BoJ appears increasingly inclined to tighten, the US Federal Reserve finds itself in a murky middle ground. US inflation readings last week — both the Consumer Price Index (CPI) and Producer Price Index (PPI) — indicated cooling price pressures. Coupled with lackluster retail sales data, these figures have strengthened the case for economic softness extending into the second half of 2025.

Despite this, Fed officials remain reluctant to endorse near-term rate cuts. New York Fed President John Williams and Atlanta Fed’s Raphael Bostic suggested on Monday that cuts may not arrive until after September, if at all. Fed Vice Chair Philip Jefferson added that a “wait-and-see” approach is prudent to avoid embedding transient price spikes into broader inflation expectations.

Yet, markets are not convinced. Futures pricing reflects expectations of two 25-basis-point cuts by year-end — a disconnect that leaves the Dollar vulnerable to downside pressure should incoming data continue to soften.

Risk sentiment also improved modestly after former US President Donald Trump claimed that Russia and Ukraine had agreed to enter ceasefire talks. While the announcement lacked official confirmation, the notion of a de-escalation in Europe added to the overall risk-on tone.

In the Middle East, however, risks remained elevated. Israel expanded ground operations in Gaza, issuing new evacuation orders in Khan Yunis. These developments serve as a reminder that geopolitical flare-ups remain a potential wild card — one that could intermittently favor haven assets like the Yen, even if current momentum is driven more by central bank policy.

Technical Analysis

From a technical standpoint, USD/JPY is flashing bearish signals that align with the broader fundamental story. On the 2-hour chart, the pair has completed a Head and Shoulders pattern — a classic bearish reversal formation. The neckline has been broken decisively, confirming the setup.

Price action now suggests a potential retest of the neckline near the 145.00 handle, which may serve as a springboard for further downside. The projected target derived from the pattern implies a move toward the 141.95–141.00 zone — a decline of roughly 300 pips from current levels. Momentum indicators, including RSI and MACD, have also flipped bearish, reinforcing the near-term downside bias.

TRADE RECOMMENDATION

SELL USDJPY

ENTRY PRICE: 144.50

STOP LOSS: 147.00

TAKE PROFIT: 141.00

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USD/JPY Breakdown Imminent? Bearish Chart Pattern Aligns with BoJ Optimism

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