USD/JPY Forecast: Bearish odds improving, drop to 108.20 likely

Technicals favor the USD/JPY bears - created a bearish outside-week candle last week.
Options still biased to the downside - JPY calls are in demand.
The EUR/JPY breakdown suggests tough times ahead for risk assets.

Omkar Godbole FXStreet Contributor

The USD/JPY pair risks falling to the gradually descending (bearish) 100-day moving average (MA), currently located at 108.20, this week, the technical studies indicate.

At press time, the pair is trading at 109.15 - down 2.20 percent from the recent high of 111.40. The pullback seems to have put the base back into the driver's seat, at least for the short-term.

Weekly chart: Key week reversal

The pair created a bearish outside-week candle last week, signaling the rally from the March 29 low of 104.63 has ended. A negative follow-through this week would confirm a bullish-to-bearish trend change.

That said, the probability that USD/JPY would drop this week is high as the bearish outside-week candle has been created near the long-term falling trendline resistance, implying bullish exhaustion. Further, it also marks a failure at 111.32 - 76.4 percent Fibonacci retracement of Jan-Mar sell-off.

Daily chart: Short-term MAs biased bearish

Meanwhile, the short-term moving averages have rolled over in favor of the bears. For instance, 5-day MA and 10-day MA bearish crossover indicate the scope for further losses in the USD/JPY pair. The 14-day relative strength index (RSI) has also dipped below 50.00, signaling a short-term bearish reversal.

The chart also shows a 50-day and 100-day MA bearish crossover. The long-term MA crossovers are lagging indicators and tend to work the other way around more often than not.

Thus, Japanese Yen will likely trade on the offensive this week.

Implied volatility premium for JPY calls surged last week

The USD/JPY one month 25 delta risk reversals fell from -0.70 to -1.275 last week, signaling a sharp rise in the implied volatility premium for JPY calls (sell JPY options). As of writing, the risk reversals stand at -1.225. Simply put, the JPY calls are in demand.

The risk reversals indicate investors are likely anticipating a deeper drop in the USD/JPY and hence could be hedging for the same via long JPY call options.

EUR/JPY - a global risk barometer is breaking down

The head-and-shoulders breakdown has opened the doors to 121.20 (target as per the measured height method). More importantly, it could be an indication of tough times ahead for riskier assets. The bearish setup in EUR/JPY only validates the bearish outlook on the USD/JPY pair.

View

The USD/JPY pair will likely take out immediate support at 108.81 - 38.2 percent Fibonacci retracement of Mar-May rally and drop to 108.20 in a week's time.
Only a daily close above 110.00 would abort the bearish view.
A convincing move through the long-term descending trendline hurdle would signal a long-term bullish breakout.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.