We saw USD/JPY sell off to the downside to test last month's spike low which has held the pullback if we can break above nearby resistance we expect a major correction to the upside.

USD/JPY has been under pressure as the market expects a dovish Fed with a 100 bps of cuts into year-end and into Friday the market was looking for a possible 50 bps cut at the Fed's upcoming meeting but NFP on Friday only points to a 25 bps cut and the USD rallied from support.

On the other side of the pair we dont expect the Bank of Japan to raise interest rates until December at the earliest and with an interest rate of just 0.25 bps the USD has a significant carry interest advantage.

The recent sell-off took out a large number of speculative carry trades and this has now pushed the USD to oversold – we now think the risk to reward is very attractive in terms of long USD trades.

Sentiment

We can see below how the JPY rallied strongly as the large number of carry trades were taken out the market and we now have seen speculators move long JPY while commercial hedgers who warned of the big JPY rally with their long position have now gone short.

Technical Analysis

The key levels of support and resistance to look out for are below.