USD/JPY Forecast: Bounce has stalled, trendline from March lows could be tested

Omkar Godbole FXStreet Contributor

The recovery rally in the USD/JPY seems to have stalled in the range of 112.00-112.75 and the bearish setup on the hourly chart indicates the lower end of the range could be put to test again.

Interestingly, the trendline connecting March lows and August lows, which acted as a strong support earlier this month, has now moved closer to 112.00.

Bearish invalidation

The bounce of the rising trendline and an upside break of the descending trendline (drawn from recent highs) witnessed last week neutralized the immediate bearish outlook. However, Thursday's bearish outside-day candle weakened the case for a rally to 113.18 and established 112.73 as the level to beat for the bulls.

Pair to re-test 112.00?

As seen in the chart above, the pair has dived out of the expanding rising channel. The relative strength index (RSI) has turned bearish and the MACD has generated a bear cross. The pair's repeated failure to beat the 100-period EMA on the 4-hour chart has likely emboldened the bears.

The related markets are also calling for a move higher in the JPY (lower in the USD/JPY) and other safe havens. For instance, at press time, the S&P 500 futures are down 0.5 percent.

As a result, the spot looks set to test demand around 112.00-111.91 (rising trendline support).

EUR/JPY cross may put a bid under USD/JPY in Europe

Italian markets could witness a relief rally today as a ratings downgrade by Moody's fell short of investors' worst expectations.

The nation's budget plan received stinging criticism from the European Commission last week and had triggered concerns that ratings firms would cut the nation below investment grade.

Indeed, Moody’s cut Italy’s credit rank by one step to Baa3, its lowest investment-grade rating, but retained the outlook for assessment at "stable", removing an immediate threat of a downgrade to junk.

Hence, Italian bonds could pick up a bid. The EUR/JPY may rise sharply in Europe, helping the USD/JPY gain altitude, if the spread between the 10-year Italy and German bonds falls below 300 basis points.

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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