USDJPY didn’t complete its recent double top pattern and instead bounced off support around the 117.25 level. Price is now on its way to test the top of the range around the 118.25 mark and may be due south if it holds as resistance.
However, it looks like sellers have already jumped in early, as price is undergoing selling pressure. Stochastic is making its way down, indicating that bears are in control and that a move back to the support area is underway. If you are bearish on this pair, it’s not too late to hop in a short trade and aim for the bottom of the range. If you are bullish though, it would be better to wait for a test of range support before going long.
The main event risk for this trade setup is the FOMC decision tomorrow, which might lead to dollar weakness if the Fed sounds more cautious. In their previous policy statement, they retained the “considerable time” wording in discussing how long rates might stay low even after easing has ended. They did add that they are being patient in considering policy normalization, which has been interpreted as a slightly hawkish signal by most market participants.
Any change in rhetoric might lead to directional moves for the dollar this week, with a more hawkish tone likely to spur strength. Inflation has still been weakening though while consumer spending has surprised to the downside, which might lead the Fed to stick to its usual spiel.
As for the yen, the slew of Japanese data on Friday might also lead to strong moves, as inflation is slated to weaken further. In their latest policy statement, the BOJ mentioned that further easing efforts aren’t necessary for now. Apart from that, the yen is also being supported by risk aversion lately.
By Kate Curtis from Trader’s Way