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The US dollar has been attempting to recover against the Japanese yen over recent days, as renewed risk-on trading sentiment helps to lift the risk-sensitive pair away from the worst levels of the month so far.
News that $2,000 spending checks have just been approved by US Congress, following President Donald Trump signing of the latest $900 billion COVID-19 relief package has naturally caused stock markets to lift even higher today.
In general, the USDJPY pair will receive a boost if stock markets are rising, and come under pressure during sell-offs. However, this correlation has been fairly weak over recent months, and has only applied during extreme risk-off events.
The USDJPY story has been one of US dollar weakness over recent weeks and months, rather than risk driven trade. This theme is set to continue, as the US dollar is still breaking down against other currencies, and the euro and the British pound now look set to move into much higher trading ranges against the greenback.
It is dififcult to know how low the USDJPY pair can drop as the US dollar continues its ongoing down trend. One thing we do know is that the Bank of Japan does prefer a weak Yen currency, and could intervene if the USDJPY pair continues to slide much further.
The red line for the Bank of Japan has previously been the 100.00 handle. With that said, they could intervene slightly before or slightly after a break of the 100.00 level took place. It is also good to know this fact as the US dollar continues to depreiciate against the Japanse yen, incase the central bank do actively enter the market.
Currently, the technical are showing a clear path lower for the pair, and if sellers can breach the 101.00 handle, then the USDJPY pair could indeed be in very real danger of breaching the psychological 100.00 benchmark level.
USDJPY Short-Term Technical Analysis
The four-hour time frame shows that a bearish breakout from a large triangle pattern has been unfolding ove recent weeks. The USDJPY pair appears to be testing back towards the initial breakout point right now.
According to technical analysis, and the overall size of the mentioned pattern, the USDJPY pair could be expected to fall towards the 102.50 area over the medium-term. Which is slightly below the current monthly price low.
Source by ActivTrader.
At present, USDJPY bulls need to move the price back above the 104.10 level to move back inside the symmetrical triangle pattern.
If the pair is rejected from the top of the wedge then the USDJPY pair could tumble to a new multi-month and multi-year low. However, a counter-rally could ensue if a bullish breakout from the triangle pattern occurs.
USDJPY Medium-Term Technical Analysis
Looking at the daily time chart, a falling wedge pattern is clearly evident. This is both good and bad for USDJPY bulls. Typically, falling wedge patterns are considered to be bullish reversal patterns, with a high degree of accuracy.
However, the USDJPY pair has not fully tested towards the bottom of the wedge yet, which implies further weakness could still occur over the medium-term horizon.
Source by ActivTrader.
Looking more closely at the triangle pattern, the bottom of the pattern is located around the 102.00 area. As such this remains a viable bearish target if weakness persists.
Should we see the USDJPY pair breaking above the wedge, around the 104.50 level, then traders should be aware that a powerful rally towards the 106.00 level could occur. This would then shift the short-term trend from bearish to bullish.
