The US dollar is coming under increasing downside pressure on the foreign exchange market against the Japanese yen currency, following a steep drop in US stock markets ahead of US earnings season.
Weakness in Japanese stocks is also causing the USDJPY pair to slide, due to the news that many of Japan’s largest cities have cleared a state of emergency as COVID-19 infections rise.
As stocks slide, traders have reverted back to old habits, as they are move back into the safety of the Japanese yen currency and gold. Yesterday, the yen currency came under pressure after the Bank of Japan suggested they may slash their 2 percent inflation target.
Worryingly for the USDJPY bulls the decline show few signs of shopping, as the pair looks set for a third straight week of heavy losses. The USDJPY pair has moved out of favour with traders after hitting 110.90 on March 31st.
This morning, the pair fell to its lowest trading level in over six-weeks after cracking the 108.00 level. A large head and shoulders pattern was also activated after the pair moved below the 108.35 level on Tuesday.
The 108.35 technical level is the key benchmark level to watch in the interim, as it marks the neckline of the mentioned bearish, which holds a downside projection of some 250 pips.
Sentiment amongst retail traders has seen a big shift since last week. And not in a good way. Retail traders are growing increasingly bullish while the USDJPY pair continues to tumble.
According to the ActivTrader Market Sentiment tool some 65% of traders are bullish towards the USDJPY pair right. Last week only 47% of traders were bullish. Traders are typically on the wrong side of the market when market skews occur, hence the move lower may continue.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the USDJPY pair has ignited a large head and shoulders pattern, after the price dropped under the 108.35 support level yesterday.
Overall, the bearish pattern holds a downside target of 250 points, which could send the pair back towards the 106.00 handle. Watch out for further weakness while the price trades under the 108.35 level.
USDJPY Medium-Term Technical Analysis
The daily time frame shows two key technical features that are of significant importance right now. Firstly, the USDJPY pair has broken below its 50-day EMA, around 108.20, meaning that the medium-term trend is weakening.
This could mean that the USDJPY pair could fall towards its 200-day moving average, around 106.60, if weakness continues below the 50-day EMA.
Something else to note is that the USDJPY pair has negative MACD price divergence, towards the 106.00 area, meaning that this divergence may soon be reversed.