USD/JPY Forecast: Bearish odds improving, drop to 108.20 likely

• Technicals favor the USD/JPY bears - created a bearish outside-week candle last week.
• Options still biased to the downside - JPY calls are in demand.
• The EUR/JPY breakdown suggests tough times ahead for risk assets.

The USD/JPY pair risks falling to the gradually descending (bearish) 100-day moving average (MA), currently located at 108.20, this week, the technical studies indicate.

At press time, the pair is trading at 109.15 - down 2.20 percent from the recent high of 111.40. The pullback seems to have put the base back into the driver's seat, at least for the short-term.

Weekly chart: Key week reversal

The pair created a bearish outside-week candle last week, signaling the rally from the March 29 low of 104.63 has ended. A negative follow-through this week would confirm a bullish-to-bearish trend change.

That said, the probability that USD/JPY would drop this week is high as the bearish outside-week candle has been created near the long-term falling trendline resistance, implying bullish exhaustion. Further, it also marks a failure at 111.32 - 76.4 percent Fibonacci retracement of Jan-Mar sell-off.

Daily chart: Short-term MAs biased bearish

Meanwhile, the short-term moving averages have rolled over in favor of the bears. For instance, 5-day MA and 10-day MA bearish crossover indicate the scope for further losses in the USD/JPY pair. The 14-day relative strength index (RSI) has also dipped below 50.00, signaling a short-term bearish reversal.

The chart also shows a 50-day and 100-day MA bearish crossover. The long-term MA crossovers are lagging indicators and tend to work the other way around more often than not.

Thus, Japanese Yen will likely trade on the offensive this week.

Implied volatility premium for JPY calls surged last week

The USD/JPY one month 25 delta risk reversals fell from -0.70 to -1.275 last week, signaling a sharp rise in the implied volatility premium for JPY calls (sell JPY options). As of writing, the risk reversals stand at -1.225. Simply put, the JPY calls are in demand.

The risk reversals indicate investors are likely anticipating a deeper drop in the USD/JPY and hence could be hedging for the same via long JPY call options.

EUR/JPY - a global risk barometer is breaking down

The head-and-shoulders breakdown has opened the doors to 121.20 (target as per the measured height method). More importantly, it could be an indication of tough times ahead for riskier assets. The bearish setup in EUR/JPY only validates the bearish outlook on the USD/JPY pair.

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• The USD/JPY pair will likely take out immediate support at 108.81 - 38.2 percent Fibonacci retracement of Mar-May rally and drop to 108.20 in a week's time.
• Only a daily close above 110.00 would abort the bearish view.
• A convincing move through the long-term descending trendline hurdle would signal a long-term bullish breakout.