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The US dollar has been surging higher against the Japanese yen currency due to a breakout in bonds and a major move higher in the US dollar index, and to a lesser degree risk-on sentiment has caused the USDJPY pair to move higher as well.
This morning’s infrastructure bill vote has caused a big sell-off in risk, which has caused the USDJPY pair to get rejected from the top of its multi-year trading range, around the 112.00 level.
The top of the USDJPY pairs range is actually around the 112.20 price zone, while the top of the US dollar index’s range is around the 94.70 level. I basically see two possible scenarios here for the USDJPY.
Looking at the price action of the USDJPY pair it is actually mimicking that of the US dollar. Both the DXY and the USDJPY pair are at a critical juncture technically, meaning that they are at the top of their multi-year ranges.
Firstly, if we see a sustained rejection from the top of the range for the US dollar index, and this would cause both the DXY the USDJPY pair to fall towards the bottom of their yearly range.
The other theory is that a range break actually takes place above 112.20, then from here we probably see the USDJPY pair surging towards the 116.00 price zone, while the DXY tackles with the 96.00 level.
According to the ActivTrader Market Sentiment tool some 75% of traders are bearish towards the USDJPY pair, which may hint those further gains are coming as bearish sentiment is rising..
This is a bullish constrain signal which is pointing to more USDJPY gains, and we should also consider that the US debt ceiling and vote on the infrastructure bill may have implications.
USDJPY Short-Term Technical Analysis
Technical analysis on the four-hour time frame shows that the USDJPY pair has invalidated a large head and shoulders pattern. However, it is not clear if a large head and shoulders pattern is forming.
According to the overall size of the invalidated head and shoulders pattern the USDJPY pair could be preparing to surge by some 300 points in the short-term, taking the USDJPY back towards the 115.00 level.
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USDJPY Medium-Term Technical Analysis
The daily time frame is showing that the USDJPY is trading the top of a large rising price channel, with the top coming in around the 112.50 level.
It should be noted that huge amount of MACD price divergence has formed on the daily frame, and this negative divergence hints that the entire move could unwind and cause a major sell-off.
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