USD/JPY has been on a tear since its putting in a false breakdown on August 23rd, trading from a low just below 104.50 to today’s highs of 108.37. USD/JPY and 10 year yields generally move in the same direction. As yields have been rising over the last few weeks, so has USD/JPY.
Is it time for USD/JPY to pull back? On August 23rd, USD/JPY put in a false breakdown out of a symmetrical triangle and traded as low as 104.44, taking out the January flash crash lows. The pair then began its run higher, moving back into the triangle. As often is the case, when there is a false breakout to one side of a pattern, the market often tests the other side. As we broke out of the top of the triangle, there was little to stop USD/JPY from moving to trendline resistance around 108.00. However today we are hitting a major resistance area near 108.50. On a daily timeframe, we can see that the 50% retracement level from the highs of April 23rd to the lows of August 23rd comes in at 108.45. There is also horizontal resistance at that level from July 31st.
On a 240-minute chart, there is a clear divergence between the price of USD/JPY and price. As the price of an asset moves higher, and the RSI moves lower, this is an indicator of a possible reversal. Also, Price is putting in a rising wedge pattern.
In a rising wedge, price will generally break lower and the target is a 100% retracement of the wedge, which in this case would be Monday’s gap lows at 107.45. Below that, Horizontal support comes in at 106.60. As previously mentioned, strong resistance at 108.45/108.50. Above that, there isn’t much in the way to horizontal resistance and previous highs near 109.30.
In addition, tomorrow is the Fed rate decision and the Fed statement. We may see some profit taking ahead of the event as traders may wish to lock in profits due to possible volatility.