USD/JPY: The Meaning of a “Full Retracement”

■ While the market continues to be influenced by headlines related to the Middle East conflict, the US Dollar Index (DXY) has formed a "double bottom" pattern and remains resilient.  

■ If the market's dominant factor shifts from a "stronger dollar" to a "weaker yen," the USD/JPY pair could even retest its April 30 high. 
 
Financial markets continue to be driven by news surrounding the Middle East conflict between the US and Iran. With the Strait of Hormuz effectively blocked, market concerns about oil supply disruptions have caused WTI crude oil futures prices to once again approach $110 per barrel. Inflationary pressures remain stubborn, and the uncertainty brought about by the protracted conflict and renewed trade frictions has increased the downside risks to the global economy. However, a series of economic data released last week showed that the US economy remains resilient. 

 
In the foreign exchange market, the dollar tends to weaken when WTI turns downward and "safe-haven buying" of the dollar retraces. Although the US Dollar Index (DXY) fell for the first time yesterday after rising for six consecutive trading days, from a technical chart perspective, it formed a double bottom-like pattern near the mid-97 level, indicating that the market is testing its support level. The dollar's downward trend since April 7th, after forming lows in the latter half of the 97 range on April 17th and May 6th, has begun to show signs of a rebound. If the DXY can break through the neckline levels of the April 27th high of 99.343 and the April 7th low of 99.516, and fill the previous gap, the dollar's upward momentum may significantly strengthen, and the market may enter a new round of upward movement. 

 
On the other hand, Japanese Prime Minister Takaichi stated that he will focus on compiling a supplementary budget for fiscal year 2026, reigniting market concerns about fiscal expansion, resulting in a broad weakening of the yen in the foreign exchange market on the 18th. If the market's dominant logic shifts from "dollar appreciation" to "yen depreciation," then the effectiveness of the Japanese authorities' yen-buying intervention will be weakened. There is a market adage: "A half-rebound often means a full retracement." In other words, when the USD/JPY rebounds after a decline and recovers half of its previous losses, the exchange rate may return to its previous high. Since April 30, when the Bank of Japan was believed to have intervened in the foreign exchange market, the USD/JPY exchange rate has fallen from 160.72 to 155.02, a cumulative drop of 5.70 yen. The exchange rate has now broken through the 50% retracement level of that decline at 157.87. A further break above the 61.8% retracement level at 158.54 would suggest a potential "full retracement" and a retest of the April 30 high of 160.72. Given the market's continued high vigilance regarding potential Japanese government intervention to buy yen, the primary focus now is whether the USD/JPY exchange rate will approach the key psychological level of 160.