USD/JPY Forecast: Bearish outside day has established 112.73 as key resistance

The USD/JPY printed a low of 111.95 and ended on a negative note at 112.17 yesterday, courtesy of the US stock market sell-off.

The weakness in the tech stocks and the resulting 2 percent drop in the Nasdaq Composite weighed over the broader markets. For instance, the Dow Jones Industrial Average dropped 327.23 points and the S&{P 500 fell 1.4 percent.

The risk aversion put a bid under the anti-risk JPY, pushing it higher across the board. The USD/JPY pair, which traded at a high of 112.73 in Europe fell back below 112.00 in the US session.

As of writing, the pair is trading at 112.30, representing moderate gains on the day, possibly because the S&P 500 futures are up 0.17 percent.

However, the gains will likely be short-lived if the China gross domestic product, scheduled for release at 02:00 GMT, shows a sharp slowdown in the world's second-largest economy, in which case, the risk aversion in the global equities may worsen, pushing the JPY higher.

On the other hand, if the global equities regain poise, then the USD/JPY pair may rise toward the previous day's high (key short-term resistance) of 112.73.

It is worth noting that CNY is closing in on the key level of 7 per dollar and that could weigh over JPY and other Asian currencies.

Daily chart

As can be seen, the pair defended the trendline from the March lows on Monday and Tuesday and jumped to highs above 112.50 on Wednesday on the back of hawkish Fed minutes, thereby raising the prospects of a re-test of the July high of 113.18.

However, yesterday's bearish outside-day candle has weakened the bullish case and has established 112.73 (yesterday's high) as the key level to beat for the bulls in the short-term.

A convincing break above 112.73 would signal a continuation of the recovery rally toward 113.18.

On the other hand, only a daily close below the ascending trendline would validate the bearish outside-day and open the doors to a deeper drop toward 110.88 (200-day EMA).

GBP/JPY has eroded two-month rising trendline

While the greenback dropped against the JPY, it posted gains against most other majors even though the origin of the risk aversion was the US stock market, possibly due to sliding CNY (anchor for FX markets).  As a result, JPY crosses fell sharply.

The GBP/JPY, in particular, was hit hard, courtesy of Brexit uncertainty and closed well below the trendline sloping north from the Aug. 15 low.

Daily chart

The pennant breakdown and acceptance below the rising trendline has turned the tide in favor of the bears. At press time, the pair is reporting marginal gains at 146.30, having defended the 38.2% Fib retracement level of 145.96 in the last few hours.

However, the bounce is likely associated with the oversold conditions on the RSI on the hourly chart and hence, will likely be short-lived.

Fresh offers could hit the pair in the range of 146.50-146.70 and a drop to 144.81 (50% Fib R of 139.90/149.72) could be in the offing.