The anticipated rise in benchmark US Treasury yields, forecasted in last Friday’s USD/JPY outlook, has materialized, driving the currency pair to fresh weekly highs. This surge, fueled by a bond sell-off in US Treasuries, has created a powerful interplay between technical factors and macroeconomic correlations, offering valuable insights for traders in the week ahead.
As the Japanese yen weakens, traders are also closely monitoring the Nikkei 225, which appears to be benefiting from a mix of improving corporate earnings prospects and an easing of concerns surrounding US President-elect Donald Trump’s proposed tariff measures. These factors are contributing to near-term tailwinds for Japanese equities, further boosting the bullish sentiment in global markets.
Last week, US bond markets experienced a significant sell-off, particularly at the longer end of the yield curve. The benchmark 10-year Treasury yields rose by 24.6 basis points (bps), coming within striking distance of the highs seen immediately after Donald Trump’s victory in the 2016 US Presidential election. The bond market turbulence has had a profound impact on USD/JPY, propelling the pair upward as yields surge.
According to TradingView data, the 10-year Treasury note futures chart revealed a sharp downturn, with prices breaking through key technical levels, including the 200-day moving average and uptrend support from mid-November. The sell-off in US Treasury futures stalled at a known horizontal support level, reinforcing the bearish outlook for bonds and confirming the technical signals that have been predicting higher yields.
In the wake of this bond bloodbath, USD/JPY traders have been closely watching the correlation between Treasury yields and the Japanese yen. Over the past month, the inverse relationship between the two has been striking, with a correlation coefficient of -0.92. As US yields rise, the USD/JPY is likely to continue its upward trajectory, making the pair highly sensitive to any changes in the US interest rate outlook.
The upward pressure on US yields has provided a clear catalyst for the USD/JPY rally. On Friday, the pair broke through the critical resistance level of 153.38, having already surpassed both the 50-day and 200-day moving averages earlier in the week. With both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators signaling bullish momentum, the technical outlook remains favorable for further gains.
Traders looking for opportunities in the pair should consider buying dips, with pullbacks toward the 153.38 level offering potential entry points. A tight stop below this level can help protect against downside risk, while topside targets of 155.89 and 156.75 present attractive possibilities for those seeking to capitalize on further USD/JPY appreciation.
However, should the price reverse below 153.38, the bullish bias could weaken. In such a scenario, short setups might not be ideal, especially with the 200-day moving average acting as nearby support. Traders with a short-term focus, such as intraday scalpers, may find opportunities, but the risk-to-reward ratio looks less favorable for longer-term positions.
As USD/JPY surges, the Nikkei 225 index is also starting to show signs of potential bullish movement. The correlation between USD/JPY and the Nikkei has been strengthening in recent weeks, with the rolling correlation coefficient reaching 0.75 over the past fortnight—its highest level in two months. This suggests that the movements in the Japanese yen are increasingly influencing the Nikkei 225, which is now pushing toward the upper end of its trading range.
For months, Nikkei futures have been confined to a tight range, with support around 38,000 and resistance near 40,000. Recently, however, the index has been testing the upper boundary of this range, finding support around the 39,000 level. This could indicate that the Nikkei 225 is preparing for a breakout, especially as momentum indicators such as RSI and MACD signal increasing bullish strength.
Traders should remain alert for a potential breakout above the key resistance level at 40,000. If the index can hold above 39,450—near its current level—there could be further opportunities to buy with a tight stop just beneath that level. However, sellers have been active above 40,000 in the past, making it an important psychological barrier that traders will want to keep an eye on. A successful breakout above this level could lead to a stronger rally toward the next resistance level.
The Nikkei 225’s recent performance suggests it could break out of its range in the short to medium term. Should the price hold above the 39,450 level, traders might look to enter long positions with a stop just below the uptrend support. This trade setup could have a favorable risk-reward ratio, especially if the index continues to show bullish momentum.
If the Nikkei fails to maintain its uptrend and drops below 39,000, the bullish outlook would be invalidated, and traders may have to reassess their positions. In that case, the existing range would remain in play, and traders could look for support around 39,000 as a potential buying opportunity or consider short setups near the 40,000 resistance level.
Looking ahead to the coming week, traders will be keeping a close eye on several risk events that could impact both USD/JPY and the Nikkei 225. The Federal Reserve’s upcoming meeting could provide crucial insights into the central bank’s stance on interest rates, potentially influencing both US yields and the USD/JPY exchange rate. Additionally, any developments in global trade policy or corporate earnings reports could provide catalysts for Japanese equities.
For now, the interplay between rising US Treasury yields, USD/JPY strength, and the Nikkei 225’s potential breakout creates an exciting environment for traders. With key technical levels in play and strong correlations between asset classes, the coming week could offer profitable opportunities for those who remain attentive to market movements.
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