- USD/JPY rallied back close to a one-week high, although it struggled to conquer the 124.00 level.
- The formation of an ascending channel favors the bulls and supports the prospects for additional gains.
- A sustained break below trend channel support is needed to nullify the constructive outlook.
The pair USD/JPY attracted some buying on the dips near the 123.45 region on Thursday and rose to a fresh daily high during the early American session. The bulls, however, had trouble capitalizing on the move and now appear to be hoping for sustained strength beyond the 124.00 round mark.
The FOMC Meeting Minutes released on Wednesday reinforced market bets for a 50bp rate hike in upcoming meetings. Investors also seem concerned that rising commodity prices will put upward pressure on already high inflation. This, coupled with more aggressive comments from St.Louis Fed President James Bullard, continued to support elevated US Treasury yields.
By contrast, Bank of Japan board member Asahi Noguchi said the central bank should maintain its ultra-loose monetary policy despite mounting inflationary pressures. This points to a wide divergence in the outlook for central bank policy, which, in turn, acted as a tailwind for the USD/JPY pair. That said, the risk aversion momentum fueled some safe haven flows into the JPY and capped the upside.
From a technical perspective, the USD/JPY pair has been trending along an upward sloping channel for the past week or so. This points to a well-established short-term uptrend and supports prospects for a further appreciation move. Therefore, a further move to test trend channel resistance, currently around the 124.30 region, remains a distinct possibility.
Some follow-on buying will mark a new breakout to the upside and set the stage for a move back towards the recovery of the psychological 125.00 mark, or the multi-year high reached in March. The momentum could extend further towards the 125.25-30 region (Aug 2015 high), above which the USD/JPY pair could rise to challenge the 2015 yearly high around the 125 zone, 85.
On the other hand, the 123.45 region appears to have emerged as strong immediate support and should protect the immediate drop ahead of the 123.30-123.25 region. The latter marks the confluence support comprising the 100-hour SMA and the lower end of the aforementioned channel, which should act as a pivotal point for traders.
A convincing break below would nullify the positive short-term outlook and trigger aggressive long-term trading around the USD/JPY pair. The corrective pullback could drag spot prices to the 123.00 round figure. This is followed by the 122.80-122.75 region and the next relevant support near the 122.35-30 and 122.00 zone.
USD/JPY 1 hour chart
Technical levels
Source: Fx Street
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