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USD/JPY Analysis: Watch Out Bulls, Vol Hints Trap Ahead?

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While the USD is being backed up by an upgrade in inflation expectations following the largest US PPI is over 6y, the latest leg up in the USD/JPY suggests a note of caution judging by the decreasing volume that it has carried over the past 4 trading days.

The impulsive demand off 112.00 appears to be running out of steam as the exchange rate is now faced with a major technical hurdle around the 114.00, area where a cluttering of volume (POC) is found as per the late Oct-early Nov 2-week auction range.

Let's find the factors justifying a continuation of the bull run:

- The S&P 500 keeps making fresh record highs while gold has been recently dumped, a communication of a risk appetite environment.

- The US vs JP 10y yield spread is holding steady near yearly highs around the 2.36%, suggesting that price is well aligned with its current value.

- US fundamentals appear to be on an upward trend, with the latest US PPI adding to the evidence, and consequently, raising expectations for a potential upgrade of the FOMC guidance for 2018 (4 vs 3 rate hikes).

On the downside, the aspects buyers should be worried about are:

- The US vs JP yield curve remains very depressed, last around 0.39%, which should cap further upside.

- The decreasing volume on the most recent climb cannot be overlooked and so far it suggests low commitment to keep pushing prices north.

- Even on such risk appetite exuberance (mainly on US equities), the pair is struggling to advance further, a reflection of the possible major offers resting ahead of 114.00.

The case can be made for the pair to trade either direction in the next 24h, especially on such a volatile event (FOMC) coming up.

The key levels to watch out for, according to FXStreet's technical confluence indicator are:

* 114: Major round number, POC from late Oct-early Nov.

* 113.80: PP 1d R1/R2, fib 161.8% weekly.

* 113.30: BB hourly middle standard dev, PP 1d S1, PP 1w R1/R2.

* 113-112.95: 200 hourly SMA, 61.8% fib on the daily and monthly.

* 112.75-85: 50 daily SMA, 38.2% fib on the daily.

Posted-In: Forex FXStreet FXstreet.comForex Markets

 

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