USD/JPY could be on the verge of a major rally as the record number of speculators who are short are taken out of the market on stop. We think the bad news is now priced in and we will see a major move to the upside.

The JPY has been strong in recent months against the USD, but we think this could be about to change...

Fundamentals

Last week, the Bank of Japan (BoJ) kept its key short-term interest rate unchanged at 0.5% during its May meeting, maintaining the highest level since 2008 and in line with market forecasts

The unanimous decision came amid rising concerns that U.S. President Trump's tariff measures could hit U.S. and global economic growth. Tokyo is currently negotiating a trade deal with Washington, which will influence future policy decisions. The board signaled that it would raise rates if economic and price forecasts warrant further tightening, which they dont at present.

In its quarterly outlook, the BoJ lowered its FY 2025 GDP growth forecast to 0.5% from 1.0% projected in January, due to trade risks and policy uncertainty. The 2026 growth outlook was also reduced to 0.7% from 1.0%. The BoJ also trimmed its core inflation forecast for FY 2025 to 2.2% from 2.7% and expects it to ease further to 1.7% in FY 2026 before ticking up to 1.9% in FY 2027. Meanwhile, headline inflation is expected to stay around 2% through the FY ending March 2028. Translated, this means interest rate hikes are on hold for now, and the Yen has a poor yield against the USD.

The USD has been weak on the view that it will lose its global reserve status, and trade wars will send the US economy into recession. We do not see it losing its reserve status anytime soon, and the market already sees the US economy going into recession, so this scenario is discounted.

The market is ignoring the evidence that the slowdown in the US economy is gradual and a recession is by no means guaranteed, and also, the US economy is in far better shape than its major rivals.

Speculative Positioning

Speculators are now holding a record-long position on the COT Net Traders Positions, and smart money commercials are heavily short, which points to a major rally in the USD as speculators get hit on stop. A couple of charts in relation to COT positioning are below.

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Technical Analysis

Our view of the big levels of support and resistance to look out for on the chart below.