Japanese Yen Technical Forecast: Bearish

  • The Yen came into the week with a full head of steam, continuing to gain as US Treasury yields were falling, thereby creating more unwind of the carry trade. But, that found support on Tuesday around some FOMC commentary and as yields pushed-higher into the end of the week, USD/JPY staged a strong recovery.
  • Yen price action has become highly dependent on movements in Treasury yields of late and the reason for that is the carry trade. If treasury yields continue their ascent, the Yen remains an attractive vehicle for funding carry; but if yields turn-around such as we saw after the July FOMC rate decision, we could see an ‘up the stairs, down the elevator’ type of dynamic.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
  • Quarterly forecasts have just been released from DailyFX and I wrote the technical portion of the US Dollar forecast. To get the full write-up, click on the link below.

It was a big week for the Japanese Yen, and we may have just seen a tonality change in the currency.

Since hitting a fresh 24-year high in mid-July, USD/JPY has been pulling back. And what initially looked like a retracement started to take on considerably more velocity as yields fell after the July FOMC rate decision. Despite the Fed’s 75 bp hike, markets were starting to price-in the possibility of an eventual pause or pivot from the FOMC. And as yields dropped, so did the attractiveness of the carry trade – and if that was a theme that was going to continue, with yields falling the exit from that bullish trend in USD/JPY that’s been going for 18 months is only so wide. And that could precipitate more selling, which is one of the reasons that pullbacks from trends can be so much sharper than the trend itself.

In USD/JPY, prices came into the week in the midst of a somewhat aggressive sell-off. I wrote about the matter on Tuesday morning, highlighting the 131.25 level that was a prior double-top in the pair. That was short-term support which led to a strong bounce, and that bounce continued through Wednesday. On Wednesday, USD/JPY had already set up for possible bullish breakout potential. Helping the matter along was a series of hawkish comments from the FOMC, key of which was the Tuesday remark from Mary Daly of the SF Fed that the bank was nowhere near done with rate hikes.

The Friday NFP report is what finally pushed USD/JPY back-above the 135.00 handle, and along for the ride was US Yields, surging higher as odds for more hikes in the future continued to get priced-in.

For next week the major focal point on the economic calendar is the Wednesday release of CPI data, expected to come in at 8.7% after last month’s 9.1%. Perhaps the bigger variable in my opinion is what weighed heavily on the matter last week, and that’s Fed-speak from FOMC members. Last week that seemed almost uniformly-hawkish, which is unusual, but it definitely seemed like the bank wanted to send a message of some sort. I’m looking for that to continue into next week.

USD/JPY

Given the matter at hand, USD/JPY remains of interest for both yield and Yen-themes. After all, if we’re seeing higher yields getting priced-in to the equation we’re likely going to be seeing some element of USD-strength to go along with Yen-weakness. The point of challenge in USD/JPY is the size of the move already, with price having jumped by almost 500 pips this week after that Tuesday reversal.

There was a short-term inverse head and shoulders pattern in USD/JPY. That cleared on the Friday breakout and prices pushed above the psychological level at 135. A pullback to support around prior resistance can keep the door open for bullish continuation. The prior neckline of the inverse head and shoulders pattern is around 134.60, so that becomes a point of interest. And there’s a Fibonacci level that’ s a bit deeper, around 133.55 that could remain as an ‘s2’ point of support.

On the resistance side of the coin, there’s a Fibonacci retracement around prior support-turned-resistance at 135.83, after which a price action swing shows up at 137.35.

USD/JPY Four-Hour Price Chart

usdjpy four hour chart

Chart prepared by James Stanley; USD/JPY on Tradingview

EUR/JPY

For those that are bullish JPY, or for those that think inflation has already-topped, EUR/JPY can be of interest. The Euro doesn’t seem to have many strong fundamental arguments at the moment and, sure, that can change, but there’s no sign of that yet.

Instead, EUR/JPY has been driven by similar Yen-themes with a tinge of added bearishness brought in by the single currency. The pair set a fresh two-month-low on Tuesday morning as a case-in-point, and as yields have risen EUR/JPY has put in a sizable bounce, jumping by more than 425 pips from the earlier-week low, as of this writing.

From the recent pullback taken from the June high down to the Monday low, there’s a series of levels from an applied Fibonacci retracement that seem to have some confluence. The 140 psychological level aligns with the 61.8% retracement of that move and there’s been quite a bit of price action at that spot when EUR/JPY was turning. If bulls can successfully mount support back-above that price, bearish scenarios won’t look very attractive. But, before that comes into play is another spot of interest, around 138.84, which lines up with a few swings on the weekly chart below.

EUR/JPY Daily Chart

eurjpy daily chart

Chart prepared by James Stanley; EUR/JPY on Tradingview

GBP/JPY

GBP/JPY has been in the midst of a pretty wide range for the past few months, with much of the action holding inside of 50 and 61.8% Fibonacci retracements from the 2015-2016 major move. I looked at this on Wednesday just after a support inflection at the 50% marker which ended up bringing an almost 400 pip bounce into the BoE rate decision on Thursday morning.

GBP/JPY Monthly Chart

gbpjpy monthly chart

Chart prepared by James Stanley; GBP/JPY on Tradingview

GBP/JPY Shorter-Term

Getting closer on the GBP/JPY highlights some pretty considerable chop inside of that longer-term range. This could make for a difficult environment to set up trends. There is a point of reference, however around the 163.90 level, a break of which could open the door for breakout potential into the 165 psychological level. Beyond that, a prior double-top sits at 166.25 that remains of interest.

On the underside of price action, I’m attaching the 159.46 Fibonacci level to the 160.00 psychological level to create a zone. Before that comes into play, the 161 level presents some support potential as that helped to form daily lows for four of the past five trading days.

GBP/JPY Daily Price Chart

gbpjpy daily chart

Chart prepared by James Stanley; GBP/JPY on Tradingview

AUD/JPY

AUD/JPY remains in the confines of a symmetrical triangle pattern. Similar to the sell-offs that had shown in many of the Yen-pairs above, AUD/JPY put in a precipitous drop that held through this week’s open. AUD/JPY tested below the 92 handle which had shown a recent penchant for support. The pair caught some extra velocity in that move-lower after the RBA rate decision on Tuesday morning, helping to form a fresh two-month-low.

But, as that Yen reversal began to push along with a return of Yen-weakness, AUD/JPY jumped, and going into next week there could be some short-term bullish potential. Now, it’s worth mentioning that the pair is still in consolidation, as evidenced by the triangle on the weekly below.

AUD/JPY Weekly Chart

audjpy weekly chart

Chart prepared by James Stanley; AUD/JPY on Tradingview

AUD/JPY Shorter-Term

The 93.88 level appears to have some importance here as there’s been a number of inflections at that price; and most recently, the pair turned-around before a test there on Thursday after it had helped to set support on the Monday prior. A break above that level opens the door for a re-test of the 95.00 psychological level. Above that is trendline/triangle resistance, which is just inside of a prior double-top at 95.76. Each of those price levels presents some potential for next resistance levels on bullish follow-through in the pair.

AUD/JPY Daily Chart

AUDJPY daily chart

Chart prepared by James Stanley; AUD/JPY on Tradingview

— Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX





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