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Japanese Yen Technical Forecast: USD/JPY Reversal, EUR/JPY Support

Japanese Yen Technical Forecast: USD/JPY Reversal, EUR/JPY Support

James Stanley, Senior Strategist

Japanese Yen Technical Forecast: Bullish

  • USD/JPY continues to fall after a strong showing in Q1.
  • EUR/JPY may be one of the more constructive short-Yen setups, with prices testing channel support after failing to drive through the 130.00 psychological level.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
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The Japanese Yen continues to show gains against most major currencies as the Q2 reversal takes hold. Last quarter brought a significant stream of Yen-weakness to the table as the reflation trade drove capital flows around-the-world. And with rates in the US edging higher, this provided even more motive for USD/JPY bulls to continue crowding the trade until the pair drove up for a fresh yearly high in the closing days of Q1.

But now just three weeks into Q2 that theme has come undone and USD/JPY has clawed back a big portion of those prior gains. As US rates have eased, helped along by a Federal Reserve that’s confident in both rates and inflation being transitory themes that require no near-term action, USD/JPY has seen strong downside momentum as a potent combination of US Dollar weakness has meshed up with that Yen strength.

US Dollar weakness was a primary theme being investigated in the Q2 Technical Forecast for the US Dollar. If you’d like to read more about that, the link below will allow you to access that forecast, and below that, I’m going to dig deeper into the specific matter around USD/JPY.

USD/JPY Snap Back

USD/JPY put in a very chaotic move around Covid last year, falling from a February high above 112.23 to a March low of 101.18. This was followed by another slingshot move back up to 111.72 by the end of March, 2020.

The rest of the year was surprisingly more calm in the pair, but it was decisively bearish as sellers controlled the matter into the end of the year. But, that allowed for a falling wedge formation to build, which will often be followed for bullish reversals; and as 2021 trade opened that’s precisely what happened, with USD/JPY jumping all the way back to the 111.00 handle to set that fresh yearly high on the final day of Q1 trade.

To learn more about the falling wedge, check out DailyFX Education

But in the few weeks since that print prices in USD/JPY have been heading in the other direction, with now more than 38.2% of that Q1 rally retraced. The Fibonacci retracement produced by last year’s major move has provided some guidance levels, with the 88.6% retracement of that move catching the Q1 high, and the 50% marker of that move around the 106.70 area on the chart.

The technical forecast for USD/JPY will be set to bearish for the week ahead.

Technical Forecast for USD/JPY: Bearish

USD/JPY Daily Price Chart

USD/JPY Chart

Chart prepared by James Stanley; USD/JPY on Tradingview

EUR/JPY Sticks to Bullish Channel

For those that are looking for strategies of Yen-weakness, EUR/JPY may hold some allure. The pair remains in a bullish trend channel that’s been active since Q4 of last year. For the past six weeks the major stumbling block for bulls has been the 130.00 psychological level, which EUR/JPY has seemingly been unable to leave behind.

This can sometimes occur around such a major psychological level, particularly in the case of an elongated trend. Frankly, EUR/JPY at 130.01 may seem much more than just 2 pips more expensive than 129.99, and this can change behavior in market participants. These situations may lead into a deeper pullback, in which sentiment may reset as those longer-term bulls are grinded out of the market. So, the bullish channel may not hold but that doesn’t necessarily obviate the recent topside trend. A big area of support for that drive could be around the 128.52 Fibonacci level.

To learn more about Fibonacci, psychological levels or trendlines – check out DailyFX Education

The forecast for EUR/JPY will be set to bullish for the week ahead.

Technical Forecast for EUR/JPY: Bullish

EUR/JPY Daily Price Chart

EUR/JPY Chart

Chart prepared by James Stanley; EUR/JPY on Tradingview

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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

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