USD/JPY Forecast: Yield differential isn't backing the USD's rebound from two-week lows
|- The USD/JPY rally from two-week lows is likely a bull trap as yield differential is falling in a USD-negative manner.
- Technically speaking, the outlook would turn bullish only after the pair has eroded the downtrend from 2015.
USD/JPY's rebound from the two-week low of 110.36 to 110.22, though encouraging, looks unsustainable if we take into account the falling 10-year US-Japan yield differential.
At press time, the currency pair is trading at a session low of 109.90, having clocked a high of 110.20 earlier today.
The pair's failure to beat the 200-day MA of 110.19 isn't surprising, given the US-Japan yield spread is losing altitude in the USD-negative manner.
The spread or the difference between the 10-year US treasury yield and the 10-year Japanese Government bond yield has dropped to 285 basis points (bps) today - down eight basis points from the current month's high of 293 bps and 20 bps from the post-GFC peak of 305 bps seen in May.
The falling yield spread puts a question mark on the sustainability of USD's rebound from 109.36 to 110.22.
Further, it appears the yield spread is creating a head-and-shoulders bearish reversal pattern with the neckline support of 2.75 percent, as seen in the chart below.
Yield spread
Acceptance below 2.75 percent would confirm a head-and-shoulders breakdown and would open up downside towards 245 basis points. In this case, the USD bears will likely make a strong comeback.
Also, technically speaking, the outlook remains bearish while the trendline sloping downwards from August 2015 high and December 2015 high is intact.
Monthly chart
The above chart also shows the pair is struggling to find acceptance above the long-term rising trendline, having breached it in a convincing manner in February 2018. The repeated failure to beat the rising trendline resistance only adds credence to the bearish picture painted by the deflating 10-year US-Japan yield spread.
Only a convincing move above the long-term falling trendline would confirm a bullish reversal.
Daily chart
A daily close below the 109.67 (50-day MA + rising trendline) would signal the rally from the March 26 low of 104.63 has ended and will likely allow a drop to 108.82 (38.2 percent Fibonacci retracement of 104.63-111.40).
View
USD/JPY rally seen in the last 24 hours could be a bull trap as indicated by the narrowing US-Japan yield spread.
The path of least resistance is to the downside. A daily close below the confluence of the rising trendline and 50-day MA would open doors for a deeper pullback to 108.81.
The overall outlook remains bearish while the long-term falling trendline (drawn from August 2015 high) is intact.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.