USD/JPY looks squeezy as buyers move in at key level

• USD/JPY buyers emerged below the 50-day moving average on Tuesday
• Near-term directional risks for US short-end rates and USD/JPY look far more balanced than a week ago
• US ISM services PMI is the key event risk for traders to navigate on Wednesday

USD/JPY may squeeze higher in the near-term ahead of the key US ISM services PMI, attracting bids below the 50-day moving average after yet another lurch lower on Tuesday. 

USD/JPY rout stalls at 50DMA

The daily chart tells the story, showing the modest bounce in USD/JPY after it traded through the level. While momentum remains to the downside, it’s difficult to ignore the price action at 50DMA given how respected it's been in the past. Rarely does it give way without USD/JPY spending a considerable amount of time on the side it crossed over to. So the fact it held on this occasion is noteworthy, at least in the near-term.

Zooming in to the 4H timeframe, there were two dips below 154.65 on Tuesday that were bought, with the second delivering a hammer signalling a potential near-term bottom. With the downtrend in RSI threatening to break and with markets adding more 11 basis points worth of rate cuts to the Fed funds rate profile for 2024 since the start of June, near-term directional risks for US short-end rates and USD/JPY look far more evenly balanced than just a week ago.

For those considering taking on the long trade, you could look to enter below 155 with a stop below 154.55 for protection. While resistance may be encountered around 155.25, to make the trade work from a risk-reward perspective, you’d really need to target 155.95 or 156.55. Given overhead resistance is nearby, if the price moves in your favour, consider raising your stop to entry level to provide a free hit on upside.

ISM services key event risk on Wednesday 

While there is Japanese wages data released on Wednesday, the main event on the calendar is the US ISM services PMI released just after the start of trade on Wall Street. For USD/JPY traders, this report has taken on added significance given renewed concerns over the US growth trajectory.

Should it confirm the dire signals in recent soft survey data, it will likely see front-end Treasury yields decline sharply as Fed rate cut bets are added, a scenario that points to amplified downside risk for USD/JPY. But if the data conflicts with the prevailing narrative, it could spark decent upside in USD/JPY as rate cut bets are curtailed.

-- Written by David Scutt

Follow David on Twitter @scutty

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