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USD/JPY Shows Bullish Reversal as FOMC Path Looks Secure on Strong US

USD/JPY Shows Bullish Reversal as FOMC Path Looks Secure on Strong US

2018-08-23 15:47:00
Tyler Yell, CMT, Currency Strategist
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USD/JPY Rate Forecast Talking Points:

  • The ONE Thing: Leading factors that favor Japanese Yen weakness are disappearing, and that could lift USD/JPY after supporting FOMC minutes and ahead of the Jackson Hole Fed Symposiums. Whether you look for signs of credit stress (there are practically none in DM) or growth about to crash (nothing imminent) traders who await a Zero Hedge headline to prompt their Yen long (USDJPY short) trade may be waiting for a while.
  • Treasury volatility when looked at a 60-week average is the lowest since 1979, all of which supports stable valuations and a healthy underlying picture of the global economy (especially in DMs) that could keep USD/JPY supported. If you could say one thing about the Japanese Yen, it would likely be that 2018 seemed like the perfect year for it to strengthen, but just like investors keep buying US stocks regardless of the headlines from Washington, traders keep refusing to buy the Yen and that trend may accelerate.
  • Technical Analysis on the Japanese Yen: The consolidation in USD/JPY has continued, and the upside in the Dollar Index has failed to lift USDJPY as many (including yours truly) would have hoped. Strategists of multiple investment banks have given up forecasting directional biases on USD/JPY, but a technical pattern that breeds confusion may be coming to a close. A three-year triangle could be on the cusp of completing, and if so, USDJPY upside may be nigh.
  • Trade wars have been in the news. If you’re not familiar with trade wars and their history, We've got you covered

KEY TECHNICAL LEVELS FOR USD/JPY:

  • Overall Bias: Anticipating a Bullish breakout above 3yr. triangle pattern
  • Resistance: ¥113.17 July High, ¥114.20 Yen per USD, November closing high
  • Spot: ¥111.20 per USD
  • Support ¥109.90 38.2% Fib of March-July Range, Andrew’s Pitchfork Support

Thanks, Technical Analysis!

Price charts serve an often-underappreciated purpose in the life and mind of investors the world over. If the market is not pricing in a big move via spot or derivatives, then the talking heads on TV are likely just drumming up the drama for the paying advertisers as opposed to the audience they’re supposed to serve.

The lack of volatility in the Treasury market, to which the Japanese Yen is HEAVILY correlated, should show you that Trade Wars, Fed-critiques et al., do not change the underlying themes of the market that continue to find multiple bright spots.

Using technical analysis to discount the noise caused by the story du jour can be best seen via the Japanese Yen or the Treasury Market. The latter is showing the lowest volatility over a 60-week average since 1979, and the former is showing a three-year triangle pattern that when it breaks (perceivably higher,) the talking heads will then have a price move to back up their “news.”

Until then, keep calm, and wait for the potential breakout as discussed below as the Fed looks to hike beyond the market’s priced in a terminal rate of 2.5-2.75% per the UST 2-year yield, and in doing so, may significantly lift USD/JPY.

The Strong Turnaround in USDJPY May Precede The Next Big Move (or Not)

Please add a description for the image.

Chart Source: IG UK Price Feed. Created by Tyler Yell, CMT

Technically Speaking on USD/JPY:

When will the consolidation ever end?

That’s the question often asked by traders who look are in the midst of a triangle pattern, which tends to correct against time more than price.

USDJPY moved aggressively lower at first after touching 125.85, but then faded sideways since. Despite the 38.2% pullback and Andrew’s Pitchfork bounce, we’re recently seen, traders will be validated with the higher probability view that a breakout is in the works (though not sure) on a break above 114.20 toward 116.80, which would align equate to a 61.8% extension of the 2016 rally from the 2018 low.

Before you get too excited, traders should be aware that the correction from the July high could still be unfolding toward ¥ 108, which is the 61.8% retracement of the March-July range, though the recent move from the 38.2% retracement could be considered a minimal target that aligns with the APF.

Some technicians are predicting a move toward 125.85 in USD/JPY, but given the lack of clear DM trades, hedge funds could (if this environment were to develop) push it far beyond the 2015 high.

More DFX Resources to Support for Your Trading:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Talk markets on twitter @ForexYell

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

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