Selling USDJPY while it is overbought after recent political news

USDJPY is now attempting to recover following its recently started correction, with Japan’s political instability serving as the pair’s key driver. Prime Minister Sanae Takaichi is preparing for early elections, fueling expectations of fiscal expansion and a potential pause in monetary tightening by the national central bank. These factors are currently weighing on the yen. The market is in anticipation of a victory for the ruling coalition and further weakening of JPY, despite numerous assurances from authorities that they are ready for currency intervention.

Japanese officials have repeatedly expressed concern about the yen’s sharp and frequent fluctuations but have not yet taken any action to address the problem. The aforementioned intervention is more likely to occur if the pair approaches the psychologically important level of 160. However, hedge funds are actively positioning themselves for USDJPY to reach 165 through derivatives with corresponding limits.

On the other hand, USDJPY’s outlook is shaped not only by the yen’s weakness but also by the dollar’s strength, derived from recent US economic data. A retail sales report for November exceeded market expectations, indicating persistent consumer demand. This discourages the Federal Reserve (Fed) from potential monetary easing and keeps interest rates anchored at current levels.

From a technical standpoint, USDJPY quotes are now attempting to find their ground following yesterday’s correction. However, oscillators show that sellers are not ready to give up, meaning that the pair is likely to dive deeper. The Chaikin Indicator, having peaked, is starting to decline, reflecting fading bullish momentum and increasing capital outflows. Meanwhile, the Stochastic one appears poised for a bearish crossover after exiting overbought territory. This setup raises the probability of a short-term drop.

Given the combination of likely currency intervention by Japanese authorities, technical signals of waning buying momentum, and the dollar’s limited upside potential amid political uncertainty, a pullback from current levels appears high. The area above 159.00 is particularly vulnerable, as both intervention and market risks intersect there.

Take a look at the following trading strategy:

Sell USDJPY from the current level. Place Take profit 1 at 157.580, Take profit 2 at 156.80, and Stop loss at 159.890.

This forecast remains relevant between January 15 and January 22, 2026.