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The US dollar has recovered back above the 109.00 level, and its 200-day simple moving average, against the Japanese yen as the US dollar index continues to catch a strong bid on the foreign exchange market.
Investors are currently optimistic about the uptick in US growth as the effects of the pandemic wane. Even the weaker-than-expected ISM manufacturing number this week failed to dent bullish sentiment towards the world’s largest economy.
A return of risk-off trading sentiment also failed to sink the USDJPY pair on Tuesday, as market fears about rising inflation and the FED tapering QE emerged. It would seem that the USDJPY pair remains well-supported ahead of this Friday’s Non-farm payrolls job report.
The good news for USDJPY bulls is that the greenback is likely to rise if the market believes that the FED may taper sooner than expected. Some FED members have even been out on the wires this week calling for a discussion about tapering.
Another key point is that the vaccine rollout has prompted optimism towards the economy and the US dollar. This is showing up in the data with American hiring numbers, and the Biden administration are set to implement more stimulus in the form of infrastructure spending.
The technical backdrop is much more bullish while the USDJPY pair trades above the 109.00 handle, however, continued gains above the 110.00 level would make it hard to justify a continuation of the late April pullback in the USDJPY pair.
According to the ActivTrader Market Sentiment tool some 60% of traders are bearish towards the pair. Bearish sentiment has increased since last week, however, the price has just continued to rise. This sets up the scenario for a major retail trader short squeeze, and therefore more upside in the USDJPY seems likely while the negative sentiment amongst the retail herd stays in place.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that USDJPY pair has formed a bearish head and shoulders pattern, after moving towards the 109.60 level and then pulling back.
According to the overall size of the bearish price pattern, the USDJPY pair could decline towards the 107.90 area if sellers breach neckline support, around the 108.77 level
If the pattern is invalidated, and the USDJPY pair moves above the 109.60 level, then this is likely to prompt a major counter rally towards the 110.50 price.
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USDJPY Medium-Term Technical Analysis
The daily time frame is also showing that a bearish head and shoulders pattern has formed, except the head and shoulders on the higher time frames in much larger than the one seen on the lower time frame.
Once again, two possible scenarios exist. Either the USDJPY pair will fall under the 108.35 level and ignite the bearish pattern, which holds 250 points of potential downside.
To the upside, a break above the 110.90 level exposes a potential rally towards the 114.00 level. Overall, further upside should be expected if the price continues to hold above the 109.30 region.
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