Technical Analysis

USD/JPY looks for more clues as sellers stay in near-term control

USD/JPY price action remains “trapped” so far today


It’s a bit of a tricky situation for USD/JPY to start the week. On the one hand, equities sentiment is holding up a tad better. On the other hand, the dollar is softer as markets continue to weigh Fed chair Powell’s dovish remarks from last Friday.

In terms of price action, it’s pretty much ping pong between the 100-hour MA (red line) and support around the 108.00 handle for the time being. Sellers continue to defend the near-term bearish bias on the day but it looks to be a case of just waiting for the right catalyst for something to happen.

In terms of risk events in the day ahead, look out for the performance of the US cash equity market but also the US December ISM non-manufacturing index release. The current rhetoric in markets right now is that we could see possible future underperformance in the US economy, which is what Powell warned about last week. Hence, the latter release will very much be a “make or break” factor for the dollar on the day.

A break back below 108.00 is significant as it opens up an extension back towards the support levels in the 107.00-50 region. Meanwhile, a break above the 100-hour MA will present a similar extension opportunity towards testing the 109.00 handle and the 200-hour MA (blue line) @ 109.53.

The other thing to consider for USD/JPY is also the indecision of Treasury yields. The Fed signalling a pause in rate hikes should be a reason for Treasury yields to fall. However, in the bigger picture, the Fed’s decision could help to alleviate downwards pressure on the economy and help stoke inflationary pressures which will aid equities and also Treasury yields.

That’s going to make trading yen pairs less straightforward in the near-term until markets figure out which narrative will dominate. On Friday, US 10-year yields moved up by ~11 bps to 2.67%. Today, it is down by 2 bps to 2.65%. If anything, it shows that the trading theme in markets this year will be a lot more complicated than it was in 2018.

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