USD/JPY daily chart
We can see on the daily chart that a bearish engulfing / outside candle formed on USD/JPY, a pattern which textbooks will show that it is a classic reversal pattern. It’s interesting to note that it formed with a false break of 147 – an area I warned about yesterday – as it includes the US ‘soft-CPI’ high and volume node from the 2022 highs.
Such patterns are key resistance area can generate a lot of excitement about a potential reversal, but I continue suspect caution is warranted around these highs regardless of whether one is bullish or bearish on the pair.
Lower US yields and USD explain the move (in response to second-tier data)
For starters, the reversal is largely a US dollar move, and one that was triggered by the US JOLTS job openings report. While the Fed does monitor it, it is generally considered a second-tier data and the Fed follows many other metrics to assess the employment market (such as NFP on Friday). That means we could just as easily see USD/JPY rally and recoup some of yesterday's losses if subsequent US data is hot, as we could see it fall further if incoming data backs up the job opening report.
But we also need to factor in the yen. While USD/JPY formed a bearish outside day, the yen remained weak against the six other forex major pairs, with an equally-weighted yen basket remaining near its cycle highs. Sure, this also keeps the pressure on the BOJ/MOF to verbally intervene if the yen loses its value too quickly against its trade partners, but at this stage we cannot yet tell if USD/JPY is the "canary in the coalmine" or the lone sheep that is about to get slaughtered.
For this reason, and as much as I love a good reversal pattern, I would prefer to stick to intraday timeframes and trade around key levels, and not look for the larger macro move. There are risks that the BOJ/MOF may verbally intervene to push USD/JPY, but there are also risks that US data could push yields and USD/JPY back higher.
USD/JPY technical analysis (1-hour chart):
USD/JPY has made the obligatory retracement against the prior day’s move, just after the Tokyo open. And given the liquidity gaps it likely left on its way down yesterday, I will not underestimate its potential to retrace higher before the next real move occurs. The 146.26 lows / daily pivot point is a potential area of interest for bears to fade into for a move towards the daily S1 / October 2022 low / June high.
Given the significance of this level, it also makes an area of interest for bulls to consider longs – especially if US data comes in strong as the week develops.
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