USD/JPY Forex Technical Analysis – Risk On Scenario Could Produce Strong Weekly Gains

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The Dollar/Yen settled lower last week, but off its low despite a plunge in Treasury yields on Friday in reaction to a weaker-than-expected U.S. Non-Farm Payrolls report. Early in the week, the Forex pair was pressured by dovish comments from Federal Reserve Chairman Jerome Powell. He opened the door to a sooner-than-expected Fed rate cut. By the end of the week, market expectations for a Fed rate cut rose in June to 27.5% form 16.7% after the release of the jobs data, according to the CME Group’s FedWatch tool. The market is also pricing in a 79% chance of lower Fed rates by July.

Last week, the USD/JPY settled at 108.203, down 0.088 or -0.08%.

The weak response to the narrowing of the spread between U.S. Government bond yields and Japanese Government bond yields should be noted. This could be an indication that a rate cut has been fully priced in. Furthermore, the strong recovery in the U.S. stock markets could also be underpinning the Dollar/Yen because of the carry trade.

The easing of tensions between the United States and Mexico could also be seen as a positive for the USD/JPY. Over the week-end, the U.S. announced a deal with Mexico over immigration issues. The U.S. then postponed tariffs that were supposed to begin on June 10.

Weekly USD/JPY

Weekly Technical Analysis

The main trend is down according to the weekly swing chart. A trade through 112.405 will change the main trend to up. A move through last week’s low at 107.810 will signal a resumption of the downtrend. This could lead to an eventual test of the next main bottom at 105.180.

The minor trend is also down. A trade through 110.677 will change the minor trend to up. This will also shift momentum to the upside.

The minor range is 105.180 to 112.405. The USD/JPY is currently trading inside its retracement zone at 108.793 to 107.940. Trader reaction to this zone will determine the short-term direction of the Forex pair.

The main range is 114.210 to 105.180. Its retracement zone at 109.695 to 110.761 is the primary upside target.

Weekly Technical Forecast

Based on last week’s price action and the close at 108.203, the direction of the USD/JPY this week is likely to be determined by trader reaction to the uptrending Gann angle at 108.055.

Bullish Scenario

A sustained move over 108.055 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into the resistance cluster at 108.793 to 108.905. Since the trend is down, look for sellers on the first test of this cluster.

Taking out 108.905 will indicate the buying is getting stronger. This could trigger a rally into the main 50% level at 109.695.

Bearish Scenario

A sustained move under 108.055 will signal the presence of sellers. The first downside targets are 107.940 and 107.810. The latter is a potential trigger point for an acceleration to the downside with the next major target angle coming in at 106.618.

Overview

The deal between the U.S. and Mexico, combined with rising expectations of a Fed rate cut may be enough to launch a further rally in the stock market. Increased demand for higher risk assets could drive the USD/JPY higher. That’s what we’ll be looking for early in the week.