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USD/JPY: bulls capped in a tight spot, on the verge of a breakout

  • USD/JPY has inched lower in the Tokyo open after a bitter bid session overnight whereby markets were in a better risk mood, although there is definitely an air of caution which underpins the yen’s upside.  
  • Currently, USD/JPY is trading at 112.31, down from the overnight high of 112.67 and down to 112.33 the fresh low here in Tokyo.

USD/JPY has been whipsawed since the latest sideways/bullish channel formed, ranging between 111.60 and 112.89 22nd Oct high. Bulls and bears battle over risk sentiment whereby the dollar has been proving its worth despite the arguments that it has run its course ahead of the US economy potentially to grinding to a halt.  

  • Wall Street extends rally, Nasdaq rises more than 3.5%

However, the data of late is a reminder just how well the US economy has been performing and that the Fed is indeed staying the course of its interest rate normalisation policy towards a neutral rate which will require rate hikes through 2019 at least. The greenback has rallied to YTD highs in the DXY with little signs of exhaustion. USD/JPY is at a crossroads on a technical  basis and 111.50 opens the case for an extended bear trend while bulls really need to make progress from here to convince that the bullish channel has legs to get back to the 114 handle.  

Eyes on BoJ policy meeting scheduled for October 31

Analysts at Rabobank noted that, aside from the levels of risk appetite in global markets, the outlook for the JPY may be impacted by the forthcoming BoJ policy meeting scheduled for October 31.  

Key Quotes:

  • Speculation has been building as to whether the BoJ may offer a policy tweak in order to support the financial sector.  This could take the form of potentially allowing yields in very long dated JGBs to rise a little further.  
  •  In July, the BoJ allowed a wider range of movement in yields though it adhered to its huge QQE programme.  
  • Any further tweaks could influence the outlook for the JPY, though we expect that in the coming weeks the overall tone of risk appetite in US equities is likely to have a greater influence on USD/JPY.  
  • We expect the currency pair to end the year close to the USD/JPY 113 level based on our assumption of broad based strength has further to run.

The next key data release will be from the US in the form of real GDP:

 US GDP Preview – 4% Here We Come?

USD/JPY levels

  • Support levels: 112.15 111.85 111.60.
  • Resistance levels: 112.90 113.20 113.50.

Valeria Bednarik, Chief Analyst at FXStreet, noted that technical indicators have lost their bullish strength after entering positive ground:

“The 4 hours chart for the pair shows that the recovery let price close, but below its 100 and 200 SMA, both converging a few pips above the current level,  The main resistance from here continues being the 112.90 price zone, this week’s high, with gains beyond the level depending on US GDP data this Friday.”

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