USD/JPY leapt higher on Friday as short sellers were forced to close their positions and buy US dollars, leading to a textbook short squeeze in the forex pair.
At the time of writing, USD/JPY had risen to a high of 117.063, gaining over 92 pips on its opening price of 116.140. It was another momentous move in what has proven to be a spectacular week in forex.
Granted, higher global yields after yesterday’s ECB meeting played a hand at weaker Japanese yen, but it was technical traders, who shorted USD/JPY hoping that the previous bearish double top formation would pay off that played a larger part in this latest move higher.
Instead, price went in the other direction, forcing them to buy back USD/JPY to close their positions and leading USD/JPY to have that upward parabolic momentum. The move is proof that at certain times technical matter just as much as fundamentals.
But more importantly, traders would be well advised to question the informational veracity of this latest move higher in USD/JPY based on its very technical nature. Regardless of their future price convictions, USD/JPY now sits almost midpoint in gigantic sell-zone between 118.477 and 115.597.
Therefore, sellers reasserting themselves, even temporarily, is a big risk at these levels. At the very least, traders should be cautious of putting too much stock in a single candle and look for further confirmation, either fundamental or technical, before laying down large positions.