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

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.