USDJPY Price Outlook:
- USD/JPY continued higher on Tuesday, moving into view of February’s high
- A surge in risk assets like the Dow Jones suggested a return of risk appetite, but a parabolic continuation seems unlikely
- Thus, USD/JPY may consolidate in the days ahead as risk trends shift
USD/JPY Targets February High Alongside Staggering Dow Jones Rally
Risk appetite reemerged on Tuesday with the Dow Jones posting its largest daily gain since 1933 despite poor economic data and surging coronavirus cases. Nevertheless, the market’s “fear gauge” continued to decline, with the VIX momentarily tagging the 36 mark before closing slightly north of 61. While the Dollar’s gain against the Yen may bode well for sentiment on the surface, the long lower wick on the VIX hints the regime of extreme volatility is not yet behind us – a prospect further evidenced by the Dow’s record-setting gain.
USD/JPY Price Chart: Daily Time Frame (May 2018 – March 2020)
Therefore, USD/JPY runs the risk of reversing lower should risk aversion return. Initial support may be offered by confluent trendlines around 109.70 before subsequent assistance comes into play at the Fibonacci level near 108.85. Together, the zones will look to ward off USD losses. Still, it is important to keep in mind the unusual trading conditions within which the market finds itself. With an unprecedented fundamental headwind, extreme risk aversion has seen Dollar strength reign – even against the Yen at times – as traders seek safety. Thus, proper risk management techniques are crucial.
On the other hand, continued risk appetite may see USD/JPY test resistance around 112 and a break above would signal a willingness among bulls to push further. With that in mind, a daily close above February’s high of 112.22 would be an encouraging technical development. While recent price action and the parabolic recovery in USD/JPY would suggest sentiment has recovered completely, I am hesitant to suggest a similar recovery in risk assets like the Dow Jones and DAX 30.
As a consequence, bouts of risk aversion can be expected which may see USD/JPY swing wildly in the days ahead – devoid of a defined trend. That said, patience may be the most prudent trading strategy for USD/JPY until a more clear-cut outlook can be evidenced. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.
--Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX
