USD/JPY Forecast: Consolidation likely, overall outlook remains constructive

The Dollar-Yen pair staged a solid rebound from the 10-DMA on Tuesday on the back of a hawkish Yellen and more 'Kim fatigue'. The spot rose to 112.48 yesterday and extended gains to a high of 112.55 levels in the Asian session today.

Despite being bid above the 200-DMA, the currency pair is having a tough time, extending gains beyond the 112.50 levels. At press time, the spot is trading at 112.37 levels. The exhaustion could be attributed to technical factors rather than macro/fundamental ones, which favor of a rally to 125.00 levels in the medium-term.

Technicals - Consolidation likely

Daily chart

  • The sliding 14-day Average True Range [ATR] suggests declining interest in the uptrend. Thus, short-term consolidation is likely in the range of 113.00 - 111.50.
  • The 14-day RSI remains bullish, the 10-DMA is sloping upwards. Thus, dips to 111.50 could be met with fresh bids.
  • The range is more likely to be breached on the higher side, given the dollar revival on the back of hawkish Fed.
  • A bearish break below 111.50 could be seen only if the situation in the Korean Peninsula escalates to a war-like situation...

However, there seems to be a consensus in the market that North Korea understands the downside of war and is unlikely to strike the US. "The most likely scenario for the US/North Korea relations remains an uneasy status quo", says Natixis Research Team.

No wonder, the markets are developing "Kim Fatigue", i.e. the risk-off on rhetoric quickly runs out of steam.

Also worth noting, Japan could suffer collateral damage if the US/North Korea go to war. Thus, the Japanese May lose its safe-haven appeal.

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