USD/JPY Susceptible to Larger Pullback as Bullish Series Sputters

JAPANESE YEN TALKING POINTS

USD/JPY pares the advance from earlier this week even as the Bank of Japan (BoJ) endorses a dovish forward guidance for monetary policy, and the dollar-yen exchange rate may attempt to fill the gap from the start of the week as it snaps the recent series of higher highs & lows.

USD/JPY SUSCEPTIBLE TO LARGER PULLBACK AS BULLISH SERIES SPUTTERS

USD/JPY pullback from a fresh monthly-high (111.40) even as BoJ Governor Haruhiko Kuroda pledges to retain the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve for the foreseeable future, and the pair appears to be reacting to the recent comments from Federal Reserve officials as market participants digest the less hawkish rhetoric coming out of the central bank.

In light of the remarks from Atlanta Fed President Raphael Bostic, Philadelphia Fed President Patrick Harker struck a similar tone, with the official largely talking down expectations for an extended hiking-cycle amid the lack of ‘rapid acceleration in inflation, or even signs of it.’ In turn, the Federal Open Market Committee (FOMC) Minutes may also do little to alter the monetary policy outlook, and more of the same from Chairman Jerome Powell and Co. may drag on the U.S. dollar as it curbs bets for four rate-hikes in 2018.

Keep in mind, the near-term outlook for USD/JPY remains constructive as both price and the Relative Strength Index (RSI) extend the upward trends from earlier this year, but recent price action raises the risk for a larger pullback in dollar-yen as the pair fails to extend the bullish series carried over from the previous week. With that said, the RSI may flash a textbook sell-signal over the days ahead, with a move below 70 raising the risk for a further decline in the exchange rate as the oscillator falls back from overbought territory.

USD/JPY DAILY CHART

• Topside targets remain on the radar for USD/JPY as the RSI holds above 70, with a break/close above the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) region raising the risk for a move towards 112.40 (61.8% retracement) to 112.80 (38.2% expansion).
• However, a string of failed attempts to break/close above the stated region raises the risk for a larger pullback, with the first downside region of interest comes in around 109.40 (50% retracement) to 110.00 (78.6% expansion)
• The 108.30 (61.8% retracement) to 108.40 (100% expansion) area comes up next followed by the Fibonacci overlap around 106.70 (38.2% retracement) to 107.20 (61.8% retracement).

For more in-depth analysis, check out the Q2 Forecast for the Japanese Yen

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.