Talking Points

  • USD/JPY has failed once again at its previous chart highs
  • Now a threatening pennant pattern could be forming
  • EUR/JPY looks much more bullish, but may be flattered by thin conditions

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The Japanese Yen moves into 2018 with bulls reaping the benefits of some general US Dollar weakness.

The reasons for this weakness remain subject to debate. And indeed it can appear hard to square with the prognosis of the Federal Reserve as the world’s most hawkish central bank and the stimulative effects –however limited- of the deepest tax cuts for a generation. However, for the moment it’s a fact and the charts would appear to confirm it.

USD/JPY recently failed close to where its last foray sputtered. December 21’s intraday peak of 113.65 marks the recent high and nearly matches that of the previous one- mid-December’s 113.74. The Dollar has spent the last nine days or so in decline, but the bears have been checked by support in the 112.05 region which, again, was where the last significant slide met its end.

Japanese Yen Technical Analysis: USD/JPY Weakness Not Yet Proven

Of course this week will continue to see trading levels curtailed by the fading holiday season and it may take until next before we see where the markets’ heart really lies. However, there is one sign we can read now. And it doesn’t look very promising for US Dollar bulls.

We can see the makings of a pennant formation on the daily chart, with reasonable validation for both its upper and lower boundaries.

Japanese Yen Technical Analysis: USD/JPY Weakness Not Yet Proven

Unhappily for Dollar bulls this might mean that weakness is here to stay. A pennant is what’s known as a continuation pattern. This means that the market action seen before it formed ought to continue once it plays out. As you can see from the chart above the preceding action was USD/JPY’s fall from the highs of late October and early November.

If this pennant remains valid then we might expect further weakness once it plays out, with support from late November in the high 110s a likely first bear target. But the uncommitted may want to wait and take a look at next week’s action to judge the real market mood.

Meanwhile the Euro is looking a lot more bullish against the Japanese currency. In recent sessions EUR/JPY has challenged and then quite convincingly broken the upside of a broad trading range which had contained all the action since mid-September. With all the current optimism glowing over the Eurozone’s economy there would seem to be a sound fundamental underpinning for this upmove.

However, it has been very sharp and the Euro is heading toward overbought territory. While there’s little reason to suppose that the range break will be rendered invalid any time soon, a little time might be needed to tell whether it’s really as emphatic as the current daily chart would have us believe.

Japanese Yen Technical Analysis: USD/JPY Weakness Not Yet Proven

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX