USD/JPY Forecast: Cautiously bearish

The Dollar-Yen pair rebounded from the upward sloping 50-day MA level of 112.47 on Wednesday, although the follow through has been weak as indicated by the ongoing struggle to cut through the resistance of 113.00 levels.

As discussed yesterday, the head and shoulders breakdown has opened doors for 111.56. So the chart-based outlook remains bearish.

Yield spread could narrow in USD-negative manner

Also, the bearish symmetrical triangle breakdown seen on the US-Japan 10-year yield indicates the spread is likely to continue falling in the USD negative manner.

Further, the one-month 25 delta risk-reversals hit one-month low yesterday, which indicates increased demand for the JPY calls.

Thus, there is merit in being bearish and expecting a drop in the USD/JPY pair to 111.56. Still, caution is advised, as the 50-day MA is sloping upwards. Plus, the 5-week MA and the 10-week MA carry a strong bullish bias (sloping upwards) as can be seen in the chart below.

Weekly chart

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The spot looks set to test 112.00 levels and may drop to 111.56 (head and shoulders target).

The upside is likely to be capped around 113.50, given the 5-day MA and the 10-day MA has adopted a bearish bias. Moreover, it could be a bull trap as suggested by the bearish breakdown on the US-Japan 10-year yield spread and risk-reversals at one-month low.

Bullish breakout scenario - A break above 114.00 (descending trendline resistance) would add credence to the upward sloping 5-week MA and 10-week MA and shall open doors for 115.00-115.50 levels.