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USD/JPY: Bullish Trajectory To Last Long

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Includes: FXY, JPYS, JYN, UDN, USDU, UUP, YCL, YCS
by: Sandeep Singh Ahluwalia
Summary

Japanese flash manufacturing PMI tumbled to 51.6 from 53.

Federal Reserve chair Jerome Powell said that he is content with the GDP growth levels.

President Donald Trump’s comments on the Federal Reserve sparked a sell off in the US dollar.

The US dollar to extend its rise to the 100% resistance level at ¥113.72.

From February 2018, the US dollar has been in a bullish phase that has resulted in it rising by 8.15% against the Japanese yen. However, for the past five trading days, the US dollar exhibited signs of weakness which caused it to tumble by 2%. But now, I believe the greenback is all set for a recovery which shall result in it commencing a fresh rally. For me to illustrate this in detail, I shall delve into the latest fundamental news affecting the pair whilst also sneaking a peek at the technical side.

Fundamental news:

  • Japan manufacturing data:
    • In July, Japan’s manufacturing sector recorded its lowest level of growth in 20 months which resulted in a dip in business confidence levels. The Japanese flash manufacturing PMI stood at 51.6 which was a drop from the prior month’s value of 53. Moreover, this brings the statistic closer to the 50 mark which puts it borderline between expansion and contraction.
  • Bank of Japan:
    • The Bank of Japan announced that it is considering making changes to its monetary policy. The main target of its changes shall be interest rates. This amplified the levels of speculation that the Bank may make a reduction to its stimulus program.
  • Federal Reserve:
    • Federal Reserve chair Jerome Powell issued a clear and concise message about the US economy. He stated that he is pleased with the GDP growth levels and the accelerated wage growth. However, he believes the high tariffs shall negatively impact the US economy in the long run.
  • President Trump’s comments:
    • United States President Donald Trump made critical comments on Friday against the Federal Reserve monetary policy. This sparked a tumble in the dollar’s value as US presidents traditionally refrain from commenting on moves made by the Fed.
    • Over the weekend at the G-20 meeting, Treasury Secretary Steven Mnuchin attempted to do some damage control as he stated that the President was not interfering with the policy of the Federal Reserve.

Technical analysis:

Price History:

USD/JPY Price history In a prior article, I had mentioned that I expect the US Dollar to rise till the ¥111.77 mark. This came true as the dollar managed to reach the value by 11th July. Moreover, it also extended its rally till the 161.8% Fibonacci resistance level at ¥113.18. However, all things went downhill, once the greenback attained the 161.8% level. This was primarily due to the greenback hitting a key resistance zone plus President Trump causing a debacle through his tweet on the Federal Reserve policy.

Daily Chart:

USD/JPY Daily Chart The pair’s daily chart indicates that in the coming days the US Dollar shall be having a bullish rally against the Japanese yen. I expect this as there has been the formation of an internal day candle pattern and that too at the 20-day moving average line. This pattern psychology indicates to investors that the bears have failed to hold onto the trend which has now resulted in the bulls gaining the upper hand. However, we shall have two to three days of sideways movement before a rally can commence.

On the price target front, I do not expect US dollar to extend its rise beyond the 100% resistance level at ¥113.72. This is due to this level being a tried and tested resistance zone. However, if it does manage to breach the 100% level then it shall extend its rally to the 127.2% level at ¥114.50.

On the indicator facet, the short-term RSI of the pair has dropped to the 9 mark which clearly indicates that a bullish turnaround is on the cards. Moreover, the ADX settings have perched at a similar level thus demonstrating that the bullish trend strength is strong.

The big picture:

Overall, I am leaning towards the bulls taking the US dollar for an uphill ride which will cause it rise to the ¥113.72 mark. However, traders can expect the pair to trade sideways for the next two to three sessions after which it shall commence the upward trajectory. Nevertheless, do ensure that you utilize trailing stops, as they shall aid in capital preservation.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.