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Japanese Yen Outlook: USD/JPY May Fall But Broader Path Remains Bullish

Japanese Yen Outlook: USD/JPY May Fall But Broader Path Remains Bullish

Daniel Dubrovsky, Strategist

Japanese Yen, Majors-Based JPY Index, USD/JPY – Analyst Pick

  • Broader path for Japanese Yen still appears to look grim
  • Majors-based JPY index may be hinting at further losses
  • There is scope for a healthy correction in the USD/JPY
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The Japanese Yen may be at risk to further losses, prolonging what has been general declines since the front-end of last year. On the weekly chart below is a majors-based Yen index, which averages its performance against the US Dollar, Australian Dollar, British Pound and Euro. When the index is falling, that means JPY is generally weakening against its major peers and vice versa.

The index broke under a Descending Triangle chart pattern earlier this year, confirming the push under in subsequent weeks. This has opened the door to further losses. Last week, the index struggled to fall under lows from 2019, reinforcing the area as key support – see chart below. But now, JPY selling pressure is leading the index to fall under those lows once again.

Confirming a breakout may open the door to the Yen broadly depreciating to its lowest since 2018. But, getting there entails breaching the 78.6% Fibonacci retracement on the chart below. Last week, prices stopped precisely on this point before leaving behind a fairly large lower shadow. Conversely, if 2019 lows hold as support once more, then JPY could be due for a bounce.

Fundamentally speaking, the anti-risk Japanese Yen may continue weakening if market sentiment remains generally upbeat. Gains in the Dow Jones and S&P 500 would likely be key culprits. Recent jitters in longer-dated Treasury yields have caught the eyes of central banks from developed nations. But, if the Federal Reserve continues to standby and focus on short-term government bonds, then Yen declines may slow.

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Majors-Based Japanese Yen Index – Weekly Chart

Japanese Yen Outlook: USD/JPY May Fall But Broader Path Remains Bullish

Chart Created in TradingView

USD/JPY Technical Analysis

USD/JPY is now eyeing the 106.86 – 107.05 resistance zone, guided higher by an Ascending Channel since the beginning of this year. If the pair manages to breach peaks from August, then that would subsequently expose highs from June (107.94 – 108.16).

Yet, negative RSI divergence does warn that upside momentum is fading. This can at times precede a turn lower. It would not be too surprising to see a fall back towards channel support given that the pair is facing an intersection between August peaks and the ceiling of the rising range.

In the event of a turn lower, that may not necessarily overturn what has been the dominant uptrend since January. A key support level to watch under the channel seems to be the February 23rd low at 104.92. Considering the scope for near-term losses, on balance, the path of least resistance seems tilted higher.

USD/JPY Bearish
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 5% -8% -2%
Weekly 20% 1% 9%
What does it mean for price action?
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USD/JPY – Daily Chart

Japanese Yen Outlook: USD/JPY May Fall But Broader Path Remains Bullish

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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