USD/JPY Forecast: 50-day MA is the level to beat for the bears

The 50-day moving average (MA) has likely put the brakes on the sell-off in the USD/JPY pair from the recent high of 114.55. As a result, the key MA of 111.86 is the level to beat for the bears.

At press time, the currency pair is trading at 112.05, having clocked a high of 112.24 earlier today.

The pair dropped 1.45 percent last week, making the anti-risk Japanese Yen the best performing major cryptocurrency as the Dow Jones Industrial Average (DJIA) fell 830 points and 500 points last Wednesday and Thursday, respectively, triggering a flight to safety.

However, despite a severe risk aversion, the JPY buyers failed to push the USD/JPY below the 50-day MA on Thursday. Further, the key MA held ground on Friday, as the US stocks produced an oversold bounce.

So, it seems safe to say that the sellers have likely run out of steam near the 50-day MA support and an acceptance below that level would signal a continuation of the sell-off from the Oct. 4 high of 114.55.

As of writing, the S&P 500 futures are down 0.33 percent and MSCI's broadest index of Asia-Pacific shares outside Japan is flashing a 0.30 percent drop, likely due to lingering trade and US rate concerns. If the US stocks resume the sell-off, as indicated by the futures, then the 50-day MA support could be breached.

However, if the origin of the risk aversion shifts in Europe, then the USD will likely attract haven demand, leading to a flat to positive action in the USD/JPY. For instance, Italy is set to submit draft 2019 budget to the European Commission today. Rome is proposing to run higher deficits and the EU is unlikely to take kindly to that, leading to a further widening of the Italy-German yield spread and risk aversion in the European stocks.

Economic data

Consumption the US as represented by retail sales, which edged up 0.1 percent in August, the smallest rise since February, is expected to report a gain of 0.6 percent in September. Control sales reading, which excludes automobiles, gasoline, building materials, and food services, are forecast to rise 0.3 percent.

A big beat on the expected figure could put a bid under the US dollar, however, the data may get little attention from the investors if the US stocks continue to push the global markets lower.

Daily Chart

As can be seen, the pair created spinning bottom-like candles on Thursday and Friday, signaling indecision or seller's exhaustion near the 50-day MA support.

The 5-day and 10-day MAs are trending south and the 14-day RSI is holding below 50.00, indicating a bearish setup.

4-hour chart

The RSI on the above chart has breached the falling trendline and has also diverged in favor of the bulls.

Clearly, technical signals are mixed, hence it's better to wait for the clear directional move. A bullish reversal would be confirmed if the spot closes today above Friday's high of 112.50. This scenario looks likely if we take into account the bullish RSI divergence on the 4-hour chart.

On the other hand, a close below the 50-day MA would signal a revival of the bearish case and would allow a deeper drop to 110.76 (38.2 percent Fib R of 104.63/114.55).