USD/JPY Analysis: Moment of Truth for the Yen’s 2023 Trend

USD/JPY Key Points

• The Bank of Japan’s steadfast devotion to keeping interest rates at 0% has served as an albatross on the yen’s neck all year long.
• However, Japan’s interest rate spreads may narrow from both sides in 2024, setting the stage for potential downtrends in XXX/JPY pairs.
• USD/JPY bulls are defending support in the 147.00 area, but the pair is vulnerable to a big breakdown from here.

Japanese Yen Fundamental Analysis

For forex traders, the single most dominant trend of 2023 has been persistent weakness in the Japanese yen. Left behind by major central banks raising interest rates more aggressively than expected, the Bank of Japan’s steadfast devotion to keeping interest rates at 0% has served as an albatross on the yen’s neck all year long.

However, that obvious-in-retrospect trade may be poised to reverse heading into 2024. Now, the expectation is that most developed central banks will be cutting interest rates, with markets pricing in around five 2024 interest rate cuts from the likes of the Federal Reserve and European Central Bank. At the same time, recent comments from the BOJ suggest that interest rates may finally start to tick higher in Japan next year, closing the XXX/JPY interest rate spread from both directions.

We’ll have plenty of economic data to mull over in the coming months – starting with Non-Farm Payrolls on Friday and followed by CPI and a Fed meeting next week – but as things stand, there’s a clear fundamental case that 2024 could be a mirror image of 2023 for XXX/JPY pairs.

Japanese Yen Technical Analysis – USD/JPY Daily Chart

Source: TradingView, StoneX

Looking at the chart of USD/JPY, rates are testing the bottom of a bullish channel that captures all of this year’s price action to date. Bulls are putting up a fight to defend this support level, where the 100-day EMA comes in as well, but unless/until the pair pops back above previous-resistance-turned-support-turned-resistance again at 148.00, the pair is vulnerable to a big breakdown.

Below the current support area, the next level to watch is around 145.00, which provided resistance back in June and support in August, followed by the 38.2% Fibonacci retracement of this year’s rally near 142.50 (not shown).

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX