Market Overview

USD/JPY Forecast: Odds Stacked Against Bullish Break, Eyes US Wage Growth Data

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USD/JPY continues to struggle to build momentum above 114.00 handle. The odds are getting stacked against a bullish break above 114.45.

Daily chart

The chart above shows-

  • Hanging man candlestick pattern (Thursday's candle)
  • Bullish 50-MA & 200-MA crossover (contrarian indicator)
  • Rising wedge pattern
  • Repeated failure to build momentum above 114.00
Key support and resistance levels
  • Rising trend line support at 113.30.
  • 112.95 (Oct. 31 low).
  • 114.30 - resistance offered by the trend line sloping downwards from Aug 2015 high and June high 2015.
  • Rising wedge resistance at 114.79.

Technical view

As per textbook rules, an end of the day close below 113.53 (yesterday's hanging man candle low) would confirm the bearish hanging man reversal. However, as noted above, the rising trend line support is seen around 113.30. Hence, a bearish reversal pattern would be confirmed only if the spot closes below 113.30. In such a case, the spot could revisit 111.94 (the weekly 200-MA) and 111.69 levels.
 
On the higher side, a move above 114.45 would expose rising wedge hurdle of 114.79 levels.
 

Bond markets also favor downside in the pair

  • Yield curve (spread between the US 10-yr yield and the 2-yr yield) is flattest since 2007. Flatter yield curve is negative for the USD bulls, especially now that the Dec rate hike has been priced in.
  • 10Y US-Japan yield spread is looking heavy... the higher lows pattern has been breached, suggests the spread could drop in the USD negative manner.
  • US 10-year yield failed to sustain above the key level of 2.4 percent and is fast losing altitude, now trading at 2.34 percent.
Focus on US wage growth figures
 
"In Friday's US jobs report, wages will remain the top market-mover in the non-farm payrolls report, where revisions will be closely scrutinized", says Adam Button from AshrafLaidi.com.
 

NFP Scenarios

James Chen from forex.com details the following NFP scenarios and the impact on the USD:
 
"With lofty consensus expectations of over 300,000 jobs added in October, our target range is somewhat less aggressive at around 270,000-300,000, given the pre-NFP data inputs. Any result falling above this range is likely to give the US dollar a substantial boost, potentially helping to extend its recent recovery. An outcome falling within or around the range is unlikely to make much of an impact on the dollar. If the actual data falls well below our target range, however, the dollar could see a significant pullback after its recent rally.
 
> 320,000
Strongly Bullish
 
301,000-320,000
Moderately Bullish
 
270,000-300,000
Neutral
 
240,000-269,000
Moderately Bearish
 
< 240,000
Bearish"
 

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  • As noted above, the technical studies and the intermarket analysis indicate the odds are stacked against USD bulls
  • Hence, it would take a big beat on the US wage growth numbers to lift the USD/JPY above 114.78 in a convincing manner
  • The USD could weaken if - NFP + wage growth numbers match estimates or print weaker-than-expected
 

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