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Japanese Yen Q3 Technical Forecast: Weakness Appears Likely in Q3

Japanese Yen Q3 Technical Forecast: Weakness Appears Likely in Q3

Diego Colman, Contributing Strategist


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Long-term price action overview

USD/JPY appears to be in a stronger state if we look at price action over the last ten years. During this long period of time, the exchange rate has moved from the 75.00 handle in 2011 to the 111.00 area in the second quarter of 2021. This information, however, may not be very useful or actionable for forex traders who often times are inclined to get in and out of positions on timescales ranging from a few days to weeks. For this reason, we turn our attention to what has transpired over a shorter timeframe.

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Focusing on the weekly chart, we can see that USD/JPY has traded with a negative bias, moving within the confines of a long-term descending channel and setting progressively lower highs for seven consecutive years. In fact, after 2015, every yearly high has been lower than the preceding yearly high. The following table illustrates this pattern:

After steady declines during the last few years, USD/JPY has been rising steadily in the first half of 2021, rebounding roughly 8% from the January low of 102.60. Following this robust rally, the pair now threatens an area of key resistance near 111.00/111.20, a technical barrier created by the upper limit of the long-term bearish channel mentioned earlier (see weekly chart below). Traders should carefully watch price action dynamics in this area because if that resistance is broken, the pair could gain further and conquer a new yearly high above 112.23, putting an end to the lower highs pattern in play since 2015. Needless to say, this breakout could create strong bullish momentum for the greenback


Chart prepared by Diego Colman, Source: IG

USD/JPY medium-term bias points to upside amid possible breakout

Zooming in on the daily chart, we can see that second quarter brought moderate levels of volatility for USD/JPY, but when it was all said and done, the pair managed to end the three month period little changed, thanks in part to a dollar rally in the last stretch of June. The greenback was able to recover some of its shine after the Federal Reserve brought forward to 2023 its interest rate lift-off and began preliminary deliberations to scale back asset purchases .

The FOMC hawkish shift briefly pushed the USD/JPY towards the 111.00 psychological level, but follow-through buying momentum appears to have weakened as lower US treasury yields at the long-end of the curve dented appetite for long dollar exposure.

In any case, irrespective of market noise and many ups and down during Q2, USD/JPY appears to be in an uptrend over the medium term, starting in early January. The fact that price is above its 200 day moving average and the presence of higher lows guided by a six-month ascending trendline confirms this bias (see daily chart below)

For bullish impulse to accelerate in the third quarter, the pair needs to climb decisively above confluent resistance near 111.00/111.20. If bulls manage to push prices above this ceiling, the USD/JPY outlook would be tilted higher, with the 2020 high at 112.33 becoming the immediate focus, followed by the 114.55/114.73 area. For the bullish scenario to remain valid, USD/JPY must remain above the April swing low (107.48) and the 200 day SMA.

On the contrary, if USD/JPY fails to pierce the 111.00/111.20 area and pivots lower, sellers can regain control of the market and provoke a drop toward trendline support, near 110.00 at the time of this writing. Should prices fall below this level, the next relevant support in play appears at 107.48, a floor established by the April swing low. If this technical support is taken out, downside pressure could strengthen, paving the way for a large sell-off.

Chart prepared by Diego Colman, Source: IG

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