The USDJPY currency pair, after a sharp decline of 12% from a 5-week peak, is now in a highly oversold zone. The yen is vulnerable to any positive surprises in the US macroeconomic data, which might make investors reconsider trading in a recession.
Market expectations for a 50-basis-point rate cut by the Fed at its September meeting remain unchanged. Overnight rate futures imply a 71% probability of such a huge step. The market has priced in policy easing of about 100 basis points for this year, and the same for 2025.
Despite extremely high levels of volatility over the past few days, the main monetary policy paths for the US dollar and the Japanese yen remain unchanged and multi-directional — the US currency is expected to weaken and the yen to strengthen. The interest rate levels of both regulators will move closer to each other in the next 2–3 years. If such a scenario develops, the USDJPY pair is likely to decline to its strong support on the monthly timeframe in the 125–127 yen per dollar zone in the very long term.
However, from a technical point of view, USDJPY is currently in a strong oversold zone and is probably aiming for a corrective move up to the 151.8 resistance level in the short term. The RSI oscillator is in the oversold zone. At the same time, it has not entered this area on the daily timeframe for more than a year.
The overall recommendation is to buy USDJPY in the mid-term.
Profits should be taken at the level of 151.8. A Stop-Loss could be set at the level of 141.0.
The possible loss should not exceed 2% of your deposit funds.
