USD/JPY Forecast: Bears in charge as Treasury yield curve is set to flatten further

Omkar Godbole FXStreet Contributor

Dollar-Yen pair regained bid tone on Wednesday but failed to take out 110.98 [61.8% Fib R of 108.80 - 114.49]. The pair ended the day at 110.74 levels. The failure at the key Fib level could be blamed on the weaker-than-expected private sector job growth in the US as highlighted by the ADP report. Dow rose above 22K and ensured the losses in the USD/JPY pair in the aftermath of the weak ADP report were capped around 110.74 levels.

Treasury yield curve set to flatten

The chart above represents the spread or the difference between the US 10-year Treasury yield and the 2-year Treasury yield.
The bearish symmetrical pattern breakdown on the chart above indicates the difference/spread [yield curve] is set to flatten further.
As discussed here, the American dollar responds positively to the steeper yield curve and vice versa.
Hence, we may see the Dollar - Yen pair revisit the Aug low of 110.92.

Technicals - 10-DMA is strong hurdle

Resistance

110.98 [61.8% Fib R of 108.80-114.49 + 4-hour 50-MA] - 110.93 [10-DMA] - 111.00 [23.6% Fib R of 114.49 - 109.92]
111.41 [100-DMA]
111.65 [50-% Fib R of 108.80-114.49] - 111.67 [38.2% Fib R of 114.49-109.92]

Support

110.56 {5-DMA]
110.28 [support on 4-hour chart]
110.92 [Aug 1 low]

Observations

1-hour chart

50-MA, 100-MA and 200-MA have bottomed out
Higher low formation

4-hour chart

50-MA has bottomed out; 100-MA is still sloping downwards

Daily chart

5-DMA, 10-DMA still sloping downwards, 14-day RSI is bearish. Yesterday’s close was above 110.62 [July 24 low], however, we are yet to see a higher lows formation.

View

Rally to 10-DMA or above cannot be ruled out, although such a move is likely to be met with fresh offers. The spot looks set to revisit 109.92 levels.
An end of the day close below the same would signal continuation of the sell-off from the high of 114.49 and yield 109.11 [June 7 low].
On the higher side, only an end of the day close above 10-DMA would signal the spot has bottomed out.

Author

Omkar Godbole

FXStreet Contributor

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

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