USD/JPY Forecast: Breakout Or Fakeout?

• The follow through to bullish break on the USD/JPY chart lacks conviction
• The 10-year yield is struggling to capitalize on the bullish break as well, risk reversals retraced gains
• The breakout could fail if US core durable goods number misses estimates

The Dollar-Yen pair closed above the key trendline resistance (sloping downwards from Mar 10 high and July 11 high) on Tuesday. The US 10-year treasury yield also moved above the key resistance level of 2.4 percent.

The bullish break on the treasury yield adds credence to the upside move in the USD/JPY pair, given there is a strong correlation between the two.

However, the action in the USD/JPY spot, USD/JPY risk reversals and US treasury yields indicate risk of a 'fakeout' (failed breakout acting as a bull trap).

USD/JPY Daily chart

The chart above shows that:

• The pair is struggling to break above 114.00 despite the break above the descending trend line.
• Major resistance levels above 114.00 are - 114.49 (July high), 115.44 (0.618 fib extension).

Weekly chart

• 114.45 - the resistance offered by the trend line sloping downwards from Aug 2015 high and Dec 2015 high is still intact.

View

• Only a weekly close above 114.45 would revive the rally from 98.79 (June 2016 low) and qualify as a major bullish break on the charts.
• The bullish break confirmed on the daily chart yesterday could fail if the US core durable goods data due today prints below estimates, in which case the spot could break below the support at 113.44 (Oct 6 high). 
• Only an end-of-the-day close below the rising trend line support would confirm a short-term bullish-to-bearish change. 

USD/JPY risk reversals - As discussed earlier today, the risk reversal gauge declined from -0.85 to -1.0 on Tuesday, suggesting increased demand for JPY calls (USD/JPY Puts) despite the bullish break on the daily chart. It indicates the breakout on the USD/JPY chart is more likely to fail.