USD/JPY Forecast: Double Bottom?

Omkar Godbole FXStreet Contributor

The Dollar-Yen pair rose to a high of 109.66 on Tuesday and extended gains to a fresh 4-day high of 109.83 earlier today before deflating to 109.37 levels. The bid tone around the Japanese Yen strengthened in Asia after President Trump, while speaking in Arizona, said “we are building that [Mexico] Wall even if we have to close down our government”.

The Tuesday’s gains are also being blamed on the rise in the US 10-year Treasury yield from 2.18% to 2.215%. However, the spread or curve between the 10-year yield and the 2-year yield barely moved and remains well below the recent high of 92 basis points.

Technicals - Double bottom on the daily chart

Multiple daily candles with long tails [dip demand below 109.00] and bullish follow through on Tuesday indicates the scope for a rally to 110.95 [Aug 16 high]. Such a move would mark the completion of a double bottom pattern.

Strong resistance at 109.69

However, there is a strong resistance at 109.69 [Flag bottom]. The decline seen today from the high of 109.82 to 109.37 marks the failure to hold above 109.69.
Only an end of the week close above 109.69 would signal add credence to the double bottom formation argument.
On the downside, an end of the day close below 109.00 would add credence to the bearish flag breakdown on the weekly chart and shall open doors for a sell-off to 106.00-105.50 levels.

Risk reversal supports rally

The one-month 25-delta risk reversal improved to -1.325 on Tuesday from the Monday’s print of -1.60. It highlights the drop in demand for Put options and supports the bullish pattern seen on the daily chart.

The yield curve is yet to break higher in favor of the USD

The curve or the spread between the 10-year Treasury yield and the 2-year Treasury yield still warrants caution on the part of the dollar bulls, given it is stuck at the falling trend line hurdle of 0.90 basis points. A break higher could lift the USD/JPY to the double bottom neckline level of 110.95.

A bullish double bottom reversal would look for more convincing if it is accompanied by break above 0.96 basis points on the yield curve [larger falling trend line hurdle].

View:

Bearish momentum appears to have run out of steam as suggested by the candlestick pattern on the daily chart and an improvement in the risk reversal.
However, a sustained rally to 110.95 and above would need steepening of the yield curve.
An end of the day close below 109.00 would be bearish.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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