USD/JPY at critical juncture with Japan's political risk and monetary policy in focus

Risks from Japan's election feature in USD/JPY price action

The upcoming July 20 Upper House election in Japan has injected fresh uncertainty into currency and bond markets.

Prime Minister Shigeru Ishiba’s LDP-Komeito coalition is facing mounting pressure, with recent polls suggesting they may fall short of the 50-seat threshold needed to retain their majority.

Failure to do so could open the door for opposition and populist parties to influence policy, potentially advocating for expansionary fiscal measures, such as large-scale government spending and tax cuts.

This prospect has already unsettled investors, sparking a sell-off in Japanese government bonds and driving long-term yields to multi-decade highs. In response, the Yen has weakened, nearing one-year lows against the US Dollar.

Should the ruling bloc suffer a decisive loss, or Ishiba be forced to resign, markets may interpret the outcome as a pivot toward looser fiscal policy and a likely pause in the BoJ's efforts to advocate for higher rates, reinforcing the interest rate divergence with the US and keeping USD/JPY elevated.

Conversely, if the coalition narrowly holds onto power, political stability may return, supporting the Yen and calming bond markets.

Notably, the election comes at a time when USD/JPY is testing a key resistance level around 149.00, with price action suggesting a possible double top formation. A spike in post-election uncertainty could act as the catalyst for a breakdown, confirming the bearish reversal pattern. On the other hand, a stable political outcome could restore confidence and trigger a bullish breakout, opening the door to higher levels.

USD/JPY sees risks of a double-top build

From a technical perspective, USD/JPY appears to be in a consolidation phase beneath a well-defined resistance zone that has formed between 148.65 and 149.00.

Price action on the daily chart has formed two distinct peaks near this area, suggesting the early formation of a potential double-top pattern, a bearish reversal signal. However, the structure remains unconfirmed until a decisive break occurs below the neckline support near 147.14, which also coincides with the 38.2% Fibonacci level of the January-April decline adding to its technical importance.

Momentum indicators, such as the Relative Strength Index (RSI), are beginning to roll over near overbought territory, hinting at a potential loss of bullish strength. Despite this, the broader trend remains constructive as the pair continues to trade above its 10-day Simple Moving Average (SMA) at 147.43 and the 50-day SMA at 145.20, reflecting underlying bullish momentum.

A confirmed break below 147.14 could accelerate downside toward 144.37 or lower, while a sustained close above 149.00 would invalidate the double-top scenario and open the door to a possible retest of the 151.62 level.