Everything flows, everything changes. As recently as mid-summer, major banks and investment firms, including Bank of America, ATFX Global Markets, and Royal Bank of Canada, insisted on the continuation of the USD/JPY rally, claiming that currency interventions by official Tokyo would not break the uptrend. However, the slowdown in the U.S. economy, the overnight rate hike by the Bank of Japan, and the mass exit of investors from carry trades have achieved the impossible – the trend has changed. Many market participants have to revise their outlook.

One of the few that still maintains a bullish position on USD/JPY is Bank of America, forecasting the pair to rise to the 150-155 range by the end of the year. According to them, a loosening of U.S. monetary policy alone will not strengthen the yen. Other factors are needed. Commonwealth Bank also sees no significant reason for a drop from current levels, setting a target of 145. In 2025, things are expected to change. The continued normalization cycle by the BoJ is anticipated to impact USD/JPY, potentially pushing it towards 139.

However, the majority of the market remains bearish on USD/JPY. They believe there will be no significant rebound in the U.S. dollar, as observed in the first half of the year. The Fed's intention to start a cycle of loosening monetary policy is seen as a fundamental reversal. As a result, the pair under analysis is expected to trend downward. Macquarie sees it at 135 by the end of the year, while Standard Chartered Bank forecasts a decline to 140 and 136 by the end of December and March, respectively.

Undoubtedly, the factors of the BoJ raising the overnight rate to 0.25% in July and reducing the scale of QE played a role in breaking the USD/JPY uptrend. However, in my view, most of the downward movement is related to the expectations of an aggressively loose U.S. monetary policy, which seems clearly overstated.

The divergence in the actions of the Fed and the Bank of Japan was discussed as early as late 2023, but the slow pace of normalization by Kazuo Ueda and his colleagues led markets to consider a still significant interest rate differential. As a result, the U.S. dollar has strengthened significantly, while the yen has underperformed relative to other G10 currencies. Currently, one more step by the BoJ towards monetary restriction is expected, so the fate of USD/JPY will depend on events in North America.

First and foremost, this depends on U.S. employment data releases. Once is a coincidence, twice is a pattern, three times is a trend. If August's data disappoints following July's, the Fed might indeed cut rates by 100 basis points in 2024. Conversely, a recovery in the labor market would provide a reason to buy the U.S. dollar against the yen.

Technical Outlook

Technically, on the daily chart, there is a chance for the activation of a 1-2-3 pattern in USD/JPY. For this to occur, a breakout above the fair value at 147 is needed, which would form the basis for long positions.