USD/JPY Forecast: ‘Reflation trade’ is overbought, correction likely

Omkar Godbole FXStreet Contributor

The reflation trade has pushed all three major US indices - Dow, Nasdaq, and S&P 500 to record highs, pushed the US dollar index to the highest since April 2003 and led to a sell-off in the bonds and safe haven assets like gold.

The Reflation trade is on ever since Donald Trump won the US Presidential Elections. Investors expect Trump to deliver on his pre election promises - cut corporation tax, ‘spend till end’, boost infrastructure spending, bring jobs back to America…

The base metals rallied as well on hopes the increased infrastructure spending in the US would boost demand.

‘Hope Trade’

The USD/JPY pair has rallied from 101.16 (Election Day low) to 111.36 (Nov 21 high).
Dow 30 index has rallied from 18,250 (Election Day low) to 19,043 (Nov 22 high).

In past, the reflation trade i.e. the drop in the Japanese Yen and the rise in the US stocks was the result of Bank of Japan’s aggressive monetary easing.

This time it is the ‘Trump Trade’ that is driving the Yen lower and the US stocks higher. Prospect of a cut in the corporation tax from 30% to 15% coupled with an increase in the infrastructure spending is too exciting for the stock market bulls.

However, the entire rally from the Election Day low is a ‘hope trade’. Donald Trump is yet to take office and there is every possibility that he may fall short of the market expectations. Furthermore, Trump has announced that he plans to scrap the TPP agreement on the first day in office. This is likely to heighten the fears of trade wars/protectionism.

USD/JPY is overbought

Daily chart - USD/JPY (Candles) & Dow (blue line)

The Dollar-Yen pair and the Dow index have moved hand in hand since the Election Day.
The daily MACD clearly shows the loss of the bullish momentum in the USD/JPY pair.
The daily RSI too is overbought and is on the verge of forming a bearish divergence with the price chart.

Dow Daily chart

The daily RSI is overbought and the MACD is showing the loss of bullish momentum.

To conclude - The overbought status of the Dow 30 index adds credence to the overbought conditions in the USD/JPY pair and suggests potential for a correction in the reflation trade. Consequently, it is safer to assume the Dollar-Yen pair is likely to witness a pull back to 1110.-109.00 levels in the short-term.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

AUD/USD consolidates above 0.6950 amid bullish USD

AUD/USD consolidates during the Asian session on Thursday, trading just above 0.6950 as traders await further developments surrounding the Middle East crisis. The Pentagon reportedly ordered readiness for potential strikes against Iran. This keeps the geopolitical risk premium in play, which, along with hawkish FOMC Minutes on Wednesday and elevated US bond yields, supports the bullish US Dollar and caps the currency pair.

USD/JPY slips below 158.00 as bulls turn cautious amid JPY intervention fears

USD/JPY retreats further from a one-and-a-half-week top, touched the previous day, and slid below 158.00 during the Asian session on Thursday amid speculation that authorities will step in to prop up the Japanese Yen. Meanwhile, the US Dollar sits near an 18-month high, supported by Wednesday's hawkish FOMC Minutes and the risk of a further escalation of tensions in the Middle East. This might continue to act as a tailwind for the currency pair.

Gold hangs near two-month low; seems vulnerable around $4,100

Gold struggles to capitalize on the overnight bounce from a two-month low, trading with a mild negative bias around $4,100 during Thursday’s Asian session. Hawkish FOMC Minutes reaffirmed bets for at least one more rate hike by year-end. Adding to this, elevated US bond yields weigh on the non-yielding bullion. The US Dollar further benefits from geopolitical uncertainties and sits near an 18-month high, undermining the commodity.

Cryptocurrencies face new security risk as Ethereum researcher warns of potential ECDSA break

Ethereum (ETH) researcher Justin Drake has urged the crypto industry to begin preparing for a potential breakthrough that could undermine the cryptographic systems securing digital assets. In an X post on Wednesday, Drake called on the industry to calmly enter what he described as “bunker mode.”

The US 10-year just hit a 2002 high. Does it give the US Dollar its next leg?

In 2026, the US Dollar Index, which measures the Dollar against six major currencies, has risen on days when Federal Reserve rate expectations pushed Treasury yields up and barely moved on days when something else did. The last stretch of the 10-year yield's climb to its highest since 2002 was the second kind.

The UK 30-year gilt just hit a 1998 high. Is that good or bad for the British Pound?

The yield on the UK's 30-year government bond, or gilt, went through 6% on October 1 for the first time since early 1998, and on Monday the Pound was at its strongest against the Euro since June 2025. The gilt market's 28-year high is mostly someone else's. Since early May, the 30-year gilt yield has risen about 0.15 of a percentage point and the US 30-year about 0.7.