USD/JPY Forecast: Prepping for corrective rally
|The odds are stacked in favor of a corrective rally in USD/JPY, technical charts indicate, although Wednesday's US CPI release could play spoilsport.
Monthly chart - defends long-term rising trendline
On Friday, bears failed to cut through the trendline sloping upwards from the 2011 low and August 2016 low. Also, the pair created a doji candle at trendline support as seen on the daily chart below.
Daily chart - doji
Doji at the long-term trendline support indicates indecision in the market ahead of the all important US CPI release. When viewed against the backdrop of the recent slide from 113.39 (Jan. 8 high), the doji candle and the defense of the long-term trendline signals bearish exhaustion.
This, coupled with a rebound in the US equities could lift USD/JPY above 109.00 levels. A positive close today, preferably above 109.00 would confirm the bull doji reversal and open doors for 110.48 (Feb. 2 high). A move to 110.48 or above looks likely on the back of strong US inflation numbers (this Friday).
That said, the spike will likely be short-lived as equities could turn risk averse in response to pick up in yields (after inflation release).
On the other hand, a big miss on the CPI may push USD/JPY lower towards 107.32 (September low), although it will likely turn out to be a bear trap as the decline in the treasury yields may help restore risk appetite in equities.
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