For USD/JPY, the path of least resistance is on the higher side, technical charts indicate, although signs of bullish exhaustion in the treasury yields are calling caution.
At press time, the USD/JPY pair is trading at 112.27, having clocked a two-month high of 112.45 yesterday.
The pullback is likely associated with the 10-year treasury yield's retreat from the four-month high of 3.09 percent to 3.06 percent but has not done any damage to the bullish technical setup.
Daily chart
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Tuesday's bullish outside-day candle and a close above 112.15 (Aug, 1 high) bolstered the already bullish setup - higher lows along the 100-day moving average (MA), bull flag breakout and rising 5-day and 10-day MAs - and opened up upside towards 113.18 (July 19 high).
Technically speaking, a close below the rising (bullish) 10-day MA of 111.78 would abort the bullish view. As of writing, the pair is holding well above the 10-day MA and the former resistance-turned-support level of 112.15 (Aug. 1 high).
So, it seems safe to say that USD bulls are still in a hunt for yearly highs above 113.00. However, the short-term bullish outlook would be invalidated if the 10-year treasury yield drops below 3.04 percent today.
10-year treasury yield daily chart
The treasury yield created a doji candle yesterday, indicating indecision in the marketplace. When viewed against the backdrop of the rally from Aug. 24 low of 2.8 percent the doji candle implies bullish exhaustion.
A close below 3.04 percent today would confirm a bearish doji reversal and could yield a deeper correction, well below 3 percent, in which case, the USD/JPY could find acceptance below 111.83 (Aug. 29 high), invalidating the bullish outlook.
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