Yen strength drives USD/JPY lower as 152 comes into view

The Japanese yen is dominating the start of the week, with USD/JPY extending its decline below 155 and trading towards 153. Thin liquidity around the US holiday likely exaggerated the initial move, but the follow-through suggests this is more than just a liquidity event.

The move still looks primarily like a yen story rather than a broad rejection of the US dollar. Markets are increasingly focused on the prospect of a more hawkish Bank of Japan, alongside expectations that Japan’s GPIF could increase its allocation towards domestic assets. That combination is encouraging investors to unwind yen-funded carry trades and rebuild exposure to Japanese assets.

From a technical perspective, USD/JPY remains firmly inside its descending channel. The break below 155.00 has weakened the structure further, with 152.00 now the next meaningful support area. That level marked an important floor earlier in the year. A decisive break below it would bring 150.00 into view.

For now, trying to fade the yen rally looks risky. Even if the short-term fundamental move appears stretched, carry-trade unwinding can become self-reinforcing: a stronger yen forces leveraged positions to reduce exposure, which creates further yen buying and adds momentum to the move.

The bigger question is whether this yen strength can continue if the Federal Reserve tightens policy next week.

The broader dollar backdrop remains more constructive than USD/JPY currently suggests. Strong US payrolls and Brent crude trading close to $100 per barrel both argue against an aggressively dovish Fed, yet markets are still pricing only around 15 basis points of tightening for September. That leaves scope for US yields and the dollar to reprice higher if incoming inflation data remain firm.

US equity futures are pointing towards a softer reopening today. In an otherwise light calendar, weaker risk sentiment could provide some support to the dollar, although probably not enough on its own to reverse the current yen momentum.

The main event for the week is therefore Friday’s US CPI report. A hotter inflation print would strengthen the case for Fed tightening and could challenge the current USD/JPY sell-off. A softer number, however, would remove one of the dollar’s remaining supports and potentially allow the move towards 152 and 150 to continue.