USD/JPY Forecast: Short-term bullish & bearish scenario

The technical outlook for USD/JPY bearish, but contradicts the rising 10-year US-Japan yield spread.

The pair breached the 200-day MA support on Wednesday as expected and fell to 111.04 (lowest level since Nov. 28) yesterday. As of writing, the exchange rate is changing hands at 111.30 levels.

As discussed on Wednesday, the technicals indicate scope for a drop to 110.00 levels. That said, the bond yield spread favors the greenback.

10-year US-Japan yield spread

The above chart shows-

• The spread has steadily increased (in the USD positive manner) from the Dec. 6 level of 227 basis points to the current level of 247 basis points.

• The spread has formed a nice rounding bottom (series of lower lows and higher lows), which suggests it could rise further in favor of the USD.

• A break above resistance at 253 basis points could put a bid under the USD/JPY pair.

Further, the 4-hour chart shows scope for a corrective move higher.

4-hour chart

• The spot could rise towards the descending trendline hurdle level of 112.20, courtesy of the bullish price RSI divergence.
• The bears seem to have run out of steam near 111.03 (50% Fib R of Sep-Nov rally). Thus, odds are high the bullish price RSI divergence would work.  

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Bullish scenario - Upbeat US CPI and retail sales number (data due today at 13:30 GMT) would-

• Add credence to the 4-hour bullish price RSI divergence and pair's successful defense of 111.03 (50% Fib R of Sep-Nov rally).
• Could push 10-year US-Japan yield spread above 253 basis points.
• & hence the pair may have a re-look at 112.00-112.20 levels.

Bearish scenario - Disappointing US data would add credence to the bearish set up on the daily chart and open doors for a drop to 110.00 levels.