Months of persistent dip-buying continue to underpin USD/JPY, though a decisive break above 164.00 is still needed to reignite bullish momentum.

Buyers again emerged on Tuesday's dip to 163.28, extending a pattern since May as dollar longs continue to build since July 21.

Yet there remains little evidence of aggressive momentum buying at current levels. Open interest in yen futures recorded its first meaningful decline since early July, suggesting traders are trimming yen short exposure as spot USD/JPY struggles to surpass last week's multi-decade peak at 163.99.

That hesitation has emerged in relatively light trading conditions, leaving the pair trapped between solid demand around 163.00-20 and equally firm offers just below 164.00. With overnight implied volatility above 14%, those boundaries appear vulnerable after the Fed decision.

One-week options are pricing in an eventual break of 164 that exposes topside barriers. Supporting that view are firmer oil prices, expectations for a hawkish Fed outcome, and the prospect that intervention fears could ease temporarily after Friday's Bank of Japan meeting.

Alternatively, rising FX and equity volatility into August could pressure yen crosses as carry trades unwind, increasing the risk of a broader USD/JPY reversal if expectations for additional Fed tightening fade and long dollar positions unwind.

Technically, a sustained move through 164.00 would likely push USD/JPY into overbought territory, with an upper Bollinger near 164.25 acting as initial resistance. However, a close above the Bollinger top would likely fuel momentum toward the key 165.00 threshold.

On the downside, a break below the Tenkan-sen near 163.00 and the 21-day moving average around 162.65 would open a path toward the cloud top and lower Bollinger near 161, potentially forcing an unwind of crowded dollar long positions.
Yen


(Robert Fullem is a Reuters market analyst. The views expressed are his own.)