USD/JPY Forecast: Bulls face an uphill task

The USD/JPY rose as high as 107.29 yesterday, but the US policy unease and the resulting drop in the US stocks and the treasury yields pushed it back to 106.30 in Asian session today.

The retreat highlights how difficult it is going to be for the USD/JPY to see any kind of meaningful gains in the near future.

  • Rising trade war fears - China will likely retaliate with targeted tariffs if Trump administration imposes tariffs on up to $60 billion worth of Chinese goods. Moreover, Trump's flexible approach with Canada, Australia indicates China is being singled out and so the world's second largest economy is unlikely to back off. The Japanese Yen, backed by the big current account surplus, stands to gain if the trade wars escalate.
  • Risky assets to feel the heat - Trade wars will likely hurt the stock markets and put a bid under the Japanese Yen.
  • Hawkish Fed will likely end up strengthening Yen as equities are no longer resilient to rising yields.
  • And last but not the least, Kuroda and Co. has little room to ease further to stave off Yen appreciation. Also, of late, Kuroda has been making subtle references to balance sheet taper. So if anything, Kuroda seems be moving towards policy normalization (Yen positive).

So, there are plenty of factors that will likely work against USD bulls. The technical chart also echoes a similar message, although over the next 24 hours, the pair may revisit 107.30.

Daily chart

The pullback from 107.29 to 106.30 is discouraging, however, the descending trendline support (former resistance breached on March 9) is still intact. Further, the bullish crossover between the 5-day moving average (MA) and the 10-day MA indicates a short-term bullish setup. Meanwhile, on the 4-hour chart, 50-MA and 100-MA have shed bearish bias (bottomed out)

So, the spot could revisit 107.32 - September low and descending daily 30-MA.

Further gains towards 107.68 could be seen if the US reports a blowout February retail sales number and the fears of trade wars ease.

That said, the sustainability of the gains is under question, given the momentum studies are biased bearish - 10-day MA and 30-day MA are trending lower in support of the bears. Also, the weekly 5-MA (106.42) and the 10-week MA continue falling in the USD-negative manner.

Bearish scenario-As mentioned earlier, yesterday's retreat from 107.29 to 106.30 has put pressure back on the bulls. A negative follow-through (preferably a close below 106.25) would signal the rally from 105.25 (March 2 low) has ended at 107.29 (yesterday's high) and could yield a re-test of 105.25 - 105.00.

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