The US dollar is in a tough spot against the Japanese yen currency right now, as the pair struggles to move back above the 110.00 level, at a time when the US dollar index is looking very troubled from a technical perspective.
Bulls have managed to hold the USDJPY above its 200-day simple moving average, however, the pair still remains vulnerable to further declines if the market continues perceive that the FED will need to continue printing money to shore-up the US economy.
Should we see inflationary pressure start to ramp up in the Japanese economy, then the USDJPY pair could be primed for further losses. This is making the upcoming Japanese CPI release incredibly important for positioning right now.
It is noteworthy that stagflation has dogged the Japanese economy for decades. If the backdrop for Japanese inflation changes, then it will be a game changer for markets. One month of strong US CPI inflation does not make a global trend, however, with supply chain issues, a lack of key car chip, and a declining labour market, the mentioned catalysts do have the potential to move the needle for Japanese inflation print.
Japanese CPI inflation is set to be released later this week, with most economists not expecting any major changes in normal CPI or core CPI. If a stronger than expected CPI or core CPI rise does occur it could be a big shock for markets.
The technical backdrop for the USDJPY pair is quite complicated right now, as a large head and shoulders pattern continues to loom in the background. Bulls need to crack the 111.00 level to invalidate the pattern, while bears have faced stiff buying pressure around 108.40 lately.
According to the ActivTrader Market Sentiment tool some 57% of traders are bearish towards the pair. Bearish sentiment has fallen since last week, although the slight negative skew remains in place. We probably need to see bullish sentiment increase further in order for a strong decline to take hold.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that USDJPY pair has formed a bullish inverted head and shoulders pattern, with the pattern holding a 130-point upside projection.
The pattern will be activated if the price moves above the 109.70 level and will place the 111.00 level back in focus if the pattern ignited to its full upside potential.
Should bears invalidate the pattern, then a decline towards the 107.00 level will take place. Bears need to move the price under the 108.30 area this week to invalidate the inverted head and shoulders pattern.
USDJPY Medium-Term Technical Analysis
The daily time frame is 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.