USD/JPY rallies into major resistance zone ahead of US data

The USD/JPY has extended its gains and has already touched the key 105.00 level this morning. However with this being an NFP week, the bulls would do well to hold onto their ground around the current levels until the employment data is out of the way on Friday. That being said, the path of least resistance is clearly to the upside and so further gains prior to the jobs data would not be entirely surprising to us, especially if the other US macro pointers, including today’s ISM manufacturing PMI, surprise to the upside. The dollar remains bid across the board anyway as the journey towards the normalisation of US monetary policy continues. In Japan, the BoJ continues to remain in a “wait and see” mode and we think Thursday’s policy statement is likely to offer few surprises, if any. Still, we expect the dips to be shallow for the USD/JPY.

At 105.00, the USD/JPY is currently hovering at a key technical juncture. As can be seen from the monthly chart, this level corresponds with a 16-year old bearish trend line. Therefore, if it manages to break above here then a move towards the January peak of 105.40/5, or the 61.8% Fibonacci retracement level of the down move from the 2007 peak, at 105.55/60, would become very likely. But more importantly, the rally may go on much further than that with the next obvious level of resistance coming in all the way at 110.65. Ahead of the 110.65 level, there are a couple of Fibonacci extension levels worth watching, such as those plotted on the daily chart (at 106.68 and 108.28). Support comes in 104.30, followed by 104.00, 103.50 and 103.00. All of these levels were previously resistance. Meanwhile the daily RSI is near 80, thus it is at an extremely overbought level. The last time the RSI reached these levels was back in January and we saw what happened next in the underling price. However the RSI can sometimes remain at extreme levels long before we see a move in the opposite direction and this could be one of those times.