Assuming the two assets will once again rebuild their strong positive relationship soon, we may either see a sharp correction in the Nikkei and continued inactivity in USD/JPY, or a vicious move higher in USD/JPY accompanied with a less robust rally in the Nikkei. With so much economic data due to be released this week (read our weekly outlook guide here) there’s potential for a strong move in at least one of these assets. Let’s look at the two in more detail:
As my colleague Matt Weller highlighted last week, the USD/JPY had been stuck inside a descending triangle pattern. As can be seen from the daily chart, it looks like the bulls have won this battle for the bears were unable to hold price below the critical support range of 100.85/101.15. What’s more, the currency pair has broken above a corrective trend line and this breakout has been confirmed by MACD posting a bullish crossover. Going forward the key resistance levels to watch are 102.25, 103.00 and 104.00. A slightly longer-term bearish trend line comes in somewhere between 102.25 and 102.50. Support is seen around 101.80, which also corresponds with the 50-day SMA, followed by 101.15 and 100.85.
The Nikkei meanwhile has also created a bullish crossover after the index broke out a pennant consolidation pattern to the upside. It has since taken out several resistance levels including the 15500/20 area, which is now likely to turn into support. The next levels to watch on the upside are 15820, 15950 and 16370/5. The first of these three potential resistance areas is the convergence of two Fibonacci levels: the 78.6% retracement of the down move from the January peak with the 161.8% extension of a much-smaller corrective intra-month move. The 15950 mark was previously resistance while 16370/5 was the high achieved in January. Overall, the technical picture for the Nikkei is still looking very strong and as things stand I wouldn’t be surprised if the index not only reaches those targets but breaks above them too.
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