USD/JPY Forecast: Cautiously bullish

USD/JPY looks set to test 110.00
But, overbought conditions as per 4H RSI shows scope for a minor pullback

The USD/JPY pair rose to 109.20 on Tuesday - the highest level since Feb. 9, but closed the day at 108.81.

The retreat from 109.20 to 108.81 could be associated with the 1.74 percent drop in the Dow Jones Industrial Average (DJIA). The equities turned risk-averse reportedly due to industrial giants Caterpillar and 3M warning on profit forecasts. The rising Treasury yields may have also played a role in pushing the equities lower.

Further, the decline from 109.20 to 108.81 adds credence to the overbought conditions as shown by the relative strength index (RSI) in the 4-hour chart below.

4-hour chart

The MACD also shows the bullish momentum has run out of steam. So, the pair could fall back in the rising channel and could revisit 108.50-108.28. That said, the decline will likely be short0lived, given the 50MA, 100MA and 200MA are aligned for a bullish move.

Daily chart

Rejection at 109.01 and a break below 108.78 would validate the overbought conditions and open the doors to 108.50-108.28. However, the 5,10 and 21MAs are trending north in favor of the bulls, and add credence to the argument that a pullback to 108.50-108.28 could be transient (its a dip buy).

View

The overbought conditions, as seen in the 4H chart and the pullback from 109.20 to 108.81 is a slight cause of concern and may yield a drop to 108.50-108.28. The overall outlook would still remain bullish and the pair remains on the hunt for a rally to 110.00

A daily close below the ascending 10-day MA would abort the bullish view.

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