USD/JPY Forecast: Consolidation with a bearish bias

USD/JPY has dropped below 110.00 for the first time since mid-February and could slide further toward 109.50, as the currency pair dived out of the rising channel on Friday, confirming a bull-to-bear trend change amid heightened recession fears. 

The US Treasury yield curve, as represented by the spread between the 10-year and three-month yields, inverted (turned negative) on Friday for the first time since 2007, triggering risk aversion. The Dow Jones Industrial Average (DJIA) fell 460 points on Friday and the Asian stocks have followed suit with the Shanghai Composite reporting a 1 percent drop at press time. The S&P 500 futures are also pointing to a 0.5 percent slide at the open. 

An inverted yield curve is widely considered an advance warning of recession.  While the spread between the 10-year and the three-year yields has turned negative, the most important section of the yield curve - the spread between the 10-year and two-year yields - is still not inverted. Also, the yield curve is only telling investors what they already know - the US economy could see a deeper slowdown in the coming months, having cooled in the last six months and that could force the Fed to cut rates in 2020. 

Even so, the JPY could continue to rise, as the bond yields in Europe are also flashing recession signals. Notably, the German 10-year yield has turned negative for the first time since 2016. 

Technicals also indicate that the path of least resistance for USD/JPY is to the downside. As of writing, the pair is trading at 109.98, having hit a low of 109.70 earlier today. 

8-hour chart

As seen above, the pair fell below the 200-candle moving average (MA) earlier today, reinforcing the bearish view put forward by both the symmetrical triangle breakdown confirmed on March 20 and the downside break of the trendline connecting Jan. 4 and Jan. 31 lows. 

The relative strength index (RSI), however, is now reporting oversold conditions. So, the pair could consolidate around 110.00 for a few hours or may witness a minor bounce to 110.20 before extending the drop toward 109.50. 

Resistance

110.47 (200-candle MA on 8H)

110.75 (March 8 low)

111.00 (psychological hurdle)

Support

109.56 (Feb. 6 low support on 8H)

109.13 (Jan. 28 low)

109.00 (psychological level)