USD/JPY Forecast: Hit 5-week low, consolidation likely

The USD/JPY pair fell to 108.11 on Tuesday - the lowest level since April 23 as the political uncertainty in Europe and the resulting risk aversion in the equities put a strong bid under the anti-risk Japanese Yen.

Fear that the new elections in Italy will deliver a stronger mandate to eurosceptic parties weighed heavily over the Italian bond and stock markets.

For instance, the two-year Italian government bond yield closed yesterday at 2.77 percent vs 0.9 percent on Monday. The 10-year yield jumped 48 basis points to 3.16 percent. Dow Jones Industrial Average (DJIA) fell nearly 400 points on Euro crisis fears.

The 10-year US Treasury yield and the 2-year treasury yield hit a 6-week low of 2.76 percent and 2.32 percent, respectively, possibly due to increased haven demand for treasuries.

Further, the risk aversion may have also forced the markets to scale back the expectations of a Fed rate hike in June. The probability of a 25 basis point rate hike in June has dropped below 80 percent from 96 percent seen two weeks ago. This should not be a cause of concern for the USD bulls as history says the Fed is comfortable lifting rates as long as the probability stands above 70 percent.

However, traders are starting to unwind bets that Fed will hike rates four times this year, the euro-dollar options activity shows, according to Bloomberg and this could hurt the greenback.

That said, the pair will likely defend the psychological support of 108.00 in the next 24 hours, the technical charts indicate.

Daily chart

The daily chart shows 50-day moving average (MA) and 100-day MA bullish crossover. The 50-day MA is trending north, indicating a bullish setup and is currently located at 108.27 and the 100-day MA is seen at 108.16. Also, the pair is trading around the ascending (bullish) 10-week MA of 108.4.

A bullish price-relative strength index (RSI) divergence is seen in the hourly chart. 

The RSI in the 4-hour chart shows oversold conditions. Also, the previous four-hour candle looks like a dragonfly doji. When viewed against a backdrop of a sell-off from 111.40 to 108.11, bull price-RSI divergence on the hourly chart, the dragonfly doji pattern indicates scope for a minor corrective rally.

So, the pair will likely defend 108.00 in the next 24 hours, although the upside could be restricted around 108.82 (38.2 percent Fibonacci retracement of Mar-May rally) as the 5-day and 10-day MAs are biased bearish (bearish crossover, trending south) and the 14-day RSI has dropped below 50.00 (in bearish territory).

View

USD/JPY will likely trade the narrow range of 108.00-108.80 in the next 24 hours or so.

A close below 108.02 (50% Fib R of Mar-May rally) would bolster the bearish technical factors listed above and could yield a temporary drop to 107.22 (61.8% Fib R of Mar-May rally).

On the higher side, a close above the 200-day MA of 110.17 would revive the bullish outlook.