USDJPY Reversal Pattern (Apr 19, 2016)

USDJPY has bounced off support near the 108.00 major psychological level once more, creating a double bottom formation on the 1-hour time frame. Price is on its way to test the neckline at 109.75 and a break above this level could spur a reversal from the previous downtrend.

The 100 SMA just crossed above the longer-term 200 SMA, suggesting that the path of least resistance is to the upside. However, stochastic and RSI are both indicating overbought conditions. Once these oscillators turn down from the overbought levels, selling pressure could return. If so, USDJPY could make its way back to the previous lows at 108.00.

If bulls are able to put up a strong fight, an upside breakout past the double bottom neckline could lead to a rally of around 175 pips, which is roughly the same height as the chart formation. On the other hand, a surge in bearish momentum might lead to a break below 108.00.

There are no major releases from both the US and Japan this week, which suggests that risk sentiment could push this pair around. Data from the US economy has been mostly weaker than expected last week, lowering the odds of a Fed rate hike this month or in June. Meanwhile, currency jawboning from Japanese officials has failed to produce their desired effect on the yen, although this might force them to take actual action.

Risk aversion was present in the markets at the start of the week after the Doha meeting failed to produce a deal to cap output. This appears to have favored the Japanese yen then, but the return in risk appetite led to a rally for USDJPY later on. Should this sentiment persist, a double bottom breakout could be a possibility.

By Kate Curtis from Trader’s Way