USD/JPY about to end consolidation and take stocks lower with it?

The US Dollar is lower once again today, with the GBP/USD rallying on the back of news UK’s employment rate hit the best level since records began in 1971 while the rate of unemployment fell to the lowest since 2008. The EUR/USD has also risen while the USD/JPY has weakened, apparently on the unwinding of the carry trades as stocks have ended their recent good run of form. The dollar could move sharply this week for not only do we have lots of US macroeconomic data to look forward to but some key earnings results too, most notably from large Wall Street banks. Although there wasn’t much in the way of US macroeconomic data on earlier this week, things should pick up from today onwards as we will have the latest retail sales and PPI figures later this afternoon. Thursday will see the release of the monthly headline and core CPI estimates; the Empire State and Philly Fed manufacturing indices, and the usual weekly unemployment claims figures. Friday’s key macro data will include the UoM Consumer Sentiment, JOLTS Job Openings, Industrial Production and Capacity Utilization Rate. So, there will be plenty of data this week to hopefully provide clear direction for the dollar.

Given their current positive correlation, if the upcoming US data inspires a sharp move in the USD/JPY pair then stocks could follow suit. So, it could be a very important week for both the USD/JPY and the stock markets. In fact, Wall Street already closed lower yesterday following the weaker Chinese trade figures and as earnings from Johnson & Johnson disappointed. JP Morgan also missed the expectations after the close. The major US indices posted bearish-looking candlestick formations on their daily charts and if we see some follow-through in the selling pressure today then this would bode ill for the USD/JPY pair in particular.

Indeed, the USD/JPY could fall sharply if the buyers fail to defend a key support area around 119.30/60. As can be seen from the 2-hour chart, below, this is where the support trend of a consolidative triangle pattern meets the point D of an AB=CD pattern. In addition, two sets of Fibonacci levels converge here (i.e. the 61.8% retracement of XA with 127.2% extension of BC). In other words, there is a potential short-term Bullish Gartley pattern entry point around 119.30/60. However, given that the USD/JPY has already taken out another bullish trend line (dotted line, on the chart), there is an increased risk we may see a breakdown here too. If seen, the USD/JPY bears may initially target the previous low at 118.65/75 (point X) followed by the slightly longer-term 61.8% Fibonacci retracement level at 118.25.

Meanwhile the daily chart of the USD/JPY reveals another important support at 118.50, a level where the USD/JPY has held above on a daily closing basis since February this year. Thus, a closing break below 118.50 would be a particularly bearish development which could see the USD/JPY head for the August low around 116.10/15 at the very least. Needless to say, a decisive break above the triangle pattern would be a bullish development, though this potential outlook seems less likely at this stage.

Figure 1:

Figure 2: