USD/JPY hits 110: where to next?

The USD/JPY fell for a time below the psychological level of 110 this afternoon before bouncing back to trade around 110.30 at the time of this writing. The selling was triggered in part by dollar weakness on the back of mixed-bag US data and recent dovish commentary from the Fed, and also on safe haven flows into the yen as equities sold off. What happens next will be very important as far as the medium term direction is concerned.

The weekly chart of the USD/JPY, below, shows that the 110 handle had been a key resistance level in the past, so there is a good chance it may turn into significant support now and lead to a big rally. However, failure to do so could lead to a significant sell-off as more long-term investors may be forced to abandon their positions, which will no doubt encourage fresh momentum selling pressure. So what happens at 110 will have a big impact on direction, potentially for the next several weeks or even months.

IF the 110 level gives way decisively then there is little further support seen on this time frame until 105.35-106.65 area. So, there is scope for another 335-535 pip drop. As can be seen from the shaded area on the chart, the upper end of this range marks the 38.2% Fibonacci retracement level of the multi-year rally, while the lower end was previously a resistance-turned-support level.

On the other hand, if the USD/JPY bounces back from the 110 level then the first major level of resistance that will need to be watched is around 111.00, the low from the recent range that price broke out from today. At this stage, the bulls will require a decisive break back above 111.00 in order for the long-term bullish trend to have any chance of resuming. Should this happen, then there is little further resistance to stand on the way of a potential rally until 116 – the neckline of the most recent bull/bear reversal pattern.

So expect to see some wild swings in the USD/JPY depending on what happens at 110.00. It should pave the way for plenty of trading opportunities.