USDJPY ready to bounce or retrace further.

USDJPY ready to bounce or retrace further.

The USDJPY has been recently provided great buying opportunities for traders. However, in recent days it has posted its largest drop since beginning the current upward at the beginning of January 2021. The question remains, is this just a standard retracement or is it a symbol of a much bigger reversal.

In the last few months, the USD has risen sharply as the market has responded to inflation fears and geopolitical events. With inflation levels at record levels across much of the developed world many Central Banks have shifted to a hawkish stance regarding their monetary policy with the USA being a prime example of this. On the contrary, the Central Bank of Japan has remained dovish almost acting as a lone solider compared to other countries in this regard. Despite this, as bond yields have begun to settle down and the market has begun to price in recession fears and inflation, the YEN has become attractive again.

Technical Analysis

Looking at the technical elements of the chart, the price is down from the multi decade highs of 139 that it reached in the middle of July. Importantly the price has also dropped below the most recent support level. In addition, the price has also breached the 50-day moving average. The question that remains is whether this is a simple retracement or the signs of a reversal occurring.

There are two characteristics of this price action that support the potential bounce back to the upside for this currency pair. Firstly, on the daily, chart, although the price did break through the initial first level of support it is currently holding the next stronger level down at 131/132. In addition, looking at the weekly chart, the price is showing a relatively strong bounce off the same 131/132 zone. This multi timeframe analysis, further supports the continuation of the upward trend of the pair. The midterm buy target may be a retest of the 140 level.

There is a large risk with this trade. If the ‘Top’ is indeed ‘in’ and the pair does start to falter, then there is risk of massive selling. This is because the pair is already so overextended to the buy side. In addition, a rush to close Yen short positions may further accelerate the move back downward. If this does occur and the 130 level breaks it may see the price fall to the 125 level.

The short-term future of the pair will still likely be determined by short term economic news and activity within both Japan and the USA.