USD/JPY Forecast: Eyes three-month long rising trendline, US-JP yield spread narrows
|- Tuesday's bearish outside-day candle makes today's close pivotal.
- 10-year US-Japan bond yield differential is charting a head-and-shoulders pattern.
- USD/JPY risks falling below the three-month-long rising trendline.
The USD/JPY pair is trading at 110.40 in Asia - down 0.15 percent on the day.
Having defended the confluence of rising trendline and 50-day MA in the last week of June, the USD/JPY convincingly crossed the falling trendline (drawn from May 21 high and June 16 low) on Monday and hence, was expected to re-test May 21 high of 11.40 this week.
Instead, it ran into offers at a high of 111.13 on Tuesday and ended up creating a bearish outside-day candle (bearish reversal pattern). Further, a short-lived break above the falling trendline (drawn from May 21 high and June 16 low) (or fake breakout) has weakened the bull case.
Daily chart
A close today below 110.50 (previous day's low) would validate the bearish outside-day candle and fake breakout and would shift risk in favor of a break below the trendline sloping upwards from the March 26 low and May 29 low.
A daily close below the three-month rising trendline would mean the rally from the March 26 low of 104.63 has ended and would put the focus back on the big bearish outside-week candle of May, allowing a deeper drop to 108.82 (38.2% Fib R of 104.63-111.40).
The 10-year US-Japan bond yield spread chart favors a convincing break in USD/JPY below the three-month-long rising trendline support, currently seen at 110.06.
Yield spread daily chart
The yield differential fell to 280 basis points on Tuesday from Monday's high of 284 basis points and is charting a head-and-shoulders bearish reversal pattern with neckline support around 2.75 percent. Acceptance below that level would open up downside towards 2.45 percent and a sharp drop in the USD/JPY pair.
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