Fed/BoJ Alliance: Has the USD/JPY Final Top Been Confirmed?U.S. DOLLAR / JAPANESE YENFX_IDC:USDJPYSwissquoteUSD/JPY: Central banks say STOP to the yen’s decline! The Japanese yen (JPY) has been following a long-term bearish trend in the FX market (meaning a bullish trend for USD/JPY) for more than 15 years. At the end of July, a massive coordinated intervention by the Fed and the BoJ triggered an 800-pip decline in USD/JPY. Tokyo and Washington have drawn a line under the yen’s depreciation. Has the definitive top been reached at 164 JPY? The major event in the foreign exchange market this summer is therefore unprecedented for several decades: a coordinated United States–Japan intervention to support the yen. The key question for investors is now whether this is simply a technical rebound in the yen or the beginning of a genuine trend reversal in USD/JPY. The answer depends on three factors: political willingness, the future monetary policies of the Fed and the BoJ, and the behavior of institutional traders in the USD/JPY market. 1) A historic intervention: Washington enters the yen debate The United States and Japan carried out coordinated yen purchases, marking the first such intervention in several decades. The context was the following: • USD/JPY was trading close to 165, levels near the highest point reached in around 40 years. • The yen was considered significantly undervalued by the US Treasury. • Japan feared that further yen weakness could trigger: •a renewed acceleration in imported inflation, •an uncontrolled rise in Japanese bond yields, •contagion spreading to the US bond market. The Federal Reserve therefore used the US Exchange Stabilization Fund to support the Bank of Japan’s intervention. The chart below shows the daily Japanese candlesticks of the USD/JPY exchange rate. 2) The yen carry trade creates structural selling pressure on the Japanese currency This massive Japanese and US intervention caught institutional traders who were betting on further yen weakness (and therefore a continued rise in USD/JPY) off guard. Institutional investors were heavily short the yen. Will they maintain these positions now that Washington and Tokyo are seeking a lower USD/JPY exchange rate and, more broadly, a weaker US dollar (DXY) on the FX market? 3) However, this double intervention will not be enough: the BoJ needs to raise rates and the Fed must at least maintain a neutral stance From a fundamental perspective, two conditions need to come together to confirm that a major top was reached at 164 JPY on Thursday, July 23. •The Bank of Japan needs to raise interest rates another one or two times before the end of 2026, particularly at the upcoming September 18 meeting. •The Federal Reserve must maintain its current policy stance or, at worst, deliver no more than one additional rate hike by the end of the year (which would require a significant decline in oil prices and core inflation remaining under control). The table below shows Bloomberg consensus expectations regarding the future evolution of USD/JPY through the end of the year. 4) From a technical perspective, USD/JPY must break below the weekly Ichimoku cloud to confirm a major top at 164 JPY From a technical analysis perspective, it is still too early to confirm that the definitive top was reached at 165 JPY. The strong support zone around 150/152 JPY would need to be broken to the downside in order to generate a major bearish technical signal. The chart below shows the weekly Japanese candlesticks of USD/JPY with the Ichimoku system. DISCLAIMER: This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. 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