We saw the USD/JPY break the 144.00 level, which we saw as significant in a previous article, and after moving strongly to the upside, we have seen a pullback which we view as a buy. Our view of the fundamentals, sentiment, and key technical levels to look out for below.

Fundamentals

The JPY has been one of the main benefitaries of a general USD pullback “Markets appear to be responding to media reports of US/Korea talks earlier this month that covered the topic of exchange rates and seemed to reinforce market suspicions of a US administration that appears to be leaning toward a preference for a weaker dollar. KRW is up over 1% on the day, and Asian currencies are leading gains in FX. The relative performance among G10 currencies is suggestive of mild risk aversion, with notable outperformance from the JPY and CHF and relative underperformance from AUD and CAD." (SCOTIABANK)

We doubt that the US wants a weaker USD, which looks like speculation and not based on any facts. We think we have a bearish extreme, and today's price action is simply follow on from CPI yesterday, but in terms of CP

“It could be worthwhile for the Fed to reject hopes of rapid interest rate cuts. After all, inflation has not fallen massively short of expectations (0.2% instead of 0.3% compared to the previous month, according to the Bloomberg survey). Perhaps we shouldn't get carried away?" (COMMERZBANK)

We think the market overreacted yesterday, and we remain USD bullish. An economy that's doing okay, a good yield, and a slowing global economy are all USD bullish.

“The global outlook argues against being overly negative on the currency as "the USD usually performs better when the global economy is slowing." (HSBC) Even without tariffs, the global economy was slowing, and this big fundamental will come into support the USD.

Interest Rate Differentials

The USD is oversold on interest rate differentials, and the JPY at just 0.5% has a very poor yield compared to many other currencies, so if the USD does mount a broad-based rally, we expect the JPY to be hit hard.

Sentiment

We noted in our previous article that speculators hold a near record short position, and this has not changed much since we published the chart below a couple of weeks ago, which is reposted below. The size of the speculative short position points to limited downside and plenty of upside from current levels.

Technicals