Carry Trade – Monthly Analysis

USD/JPY dropped sharply during the final two days of July. Today, we will evaluate how this move affected the pair’s mid- and long-term outlook.

In a market full of noise, interventions, policy shifts, and constant speculation, the larger technical structure has continued to follow the same roadmap. In this USD/JPY analysis, we reassess the pair through major currency dynamics, technical signals, and long-term structure to determine whether the bullish path remains intact, what could invalidate it, and what may shape the next major move.

CANDLES

Last week, we discussed the technical stretch as an early warning of a potential pullback. This week, that pullback materialized—and it was sharper than expected. As a result, USD/JPY lost the 200 DMA on the daily frame, while the weekly is now approaching the 50 WMA. Both timeframes have also formed bearish reversal candles.

The monthly candle closed as a Bearish Engulfing, although the pair managed to hold the 8 EMA. This is now a critical area. The monthly signal still requires confirmation, and there is a growing chance that the pullback could be sharp but relatively brief, followed by a recovery before the end of August.

The pair could decline toward the 2026 low, potentially completing a diagonal, before resuming the larger rally from that area.

While the short- and mid-term outlook is bearish, USD/JPY remains neutral on the monthly frame and firmly bullish on the larger timeframes.

ELLIOTT WAVES

Following the sharp move lower, I now view the advance from the April low as a Leading Diagonal for wave i. Wave ii has solid odds of retracing toward the April low before wave iii begins from that area.

For now, the long-term targets for USD/JPY remain intact.

Summary

USD/JPY has shifted bearish on the short- and mid-term frames after the sharp decline, with the daily losing the 200 DMA and the weekly approaching the 50 WMA. The monthly Bearish Engulfing adds pressure, although the pair remains neutral on the monthly frame and firmly bullish on the larger ones. The advance from the April low may have completed a Leading Diagonal for wave i, leaving room for wave ii to revisit the April area before the larger wave iii begins. For now, the long-term bullish targets remain intact.

Continued USD/JPY softness would imply a stronger yen and could create broader market pressure if the move accelerates. A rapid decline could force a partial unwind of yen-funded carry trades, increasing volatility and weighing on global equities, particularly Japanese exporters and other risk-sensitive assets. It could also coincide with softer US yields and a weaker US dollar.

The impact on commodities would depend on what drives the move. If USD/JPY declines primarily because of broad dollar weakness and falling US yields, gold and other commodities could benefit. If the decline reflects a stronger risk-off impulse and carry-trade liquidation, equities and oil could come under temporary pressure despite the weaker dollar.

Overall, the current move could create a period of elevated volatility across currencies and risk assets, but it does not yet invalidate the larger bullish roadmap for USD/JPY.