USD/JPY Forecast: Neutral to bullish outlook on 4hr, Options favor downside

A drop from 109.78 has neutralized the immediate bullish outlook.
Focus on stock markets.
A weekly close below 108.00 would revive bearish move.

Omkar Godbole FXStreet Contributor

The USD/JPY pair was on track to test 110.0 levels yesterday, courtesy of a bullish technical set up, but the risk aversion played spoil sport.

The US equities tanked (Dow fell 1000 points), thus boosting demand for the anti-risk currencies like Yen. So, the USD/JPY pair fell to 108.58 and extended losses in Asia to 108.50, before recovering rising back to 109.00 levels.

The drop from 109.78 to 108.50 has neutralized the immediate bullish outlook. That said, the pair could still test 110.00-110.48 levels in the short-run, technical charts indicate.

4-hour chart

The area below 108.50 has once again acted as indicated the move higher from 108.50 to 109.00 in Asia.
As long as the support holds, the odds of the pair rising towards 110.00-110.48 will remain high.
Further, as noted yesterday, the 50-MA and 100-MA have bottomed out in favor of the bulls.

Monthly chart

Also, a major resistance is lined up at 108.00 - trendline sloping upwards from Sep. 2012 low and Aug. 2016 low.

And last but not the least, the People's Bank of China has reportedly added about CNY 2 trillion in liquidity. S&P 500 futures turned positive after the news hit the wires and were last seen trading 0.40 percent higher.

Technical View

The immediate bullish outlook has been neutralized, but the spot is still holding above the support zone of 108.00-108.50 and a move above 109.30 (4-hour 50-MA) would open up upside towards 110.00 - 110.48 (Feb. 2 high).
Meanwhile, a weekly close below (closes today) below 108.00 (long-term ascending trendline support) would revive the bearish view and open doors for 106.64 (38.2% Fib R of 2011 low - 2015 high).

It is worth noting that demand for JPY calls continue to rise. The one-month 25-delta risk reversals slipped to -2.425 today - the lowest level since May. 18. The negative print indicates JPY calls (bullish bets) are in demand. The recent high stands at -0.55 (Jan. 8 high).

Risk reversals (JPY1MRR)

So, caution is the name of the game despite the neutral to bullish outlook put forward by the technical chart.

Also, US government shutdown has begun on fiscal hawk Paul's dissent. So far, the news has not had a big impact on the USD or equities. However, if markets turn risk averse, the USD/JPY could drop. However, as mentioned earlier, only a weekly close below 108.00 would revive the bearish view.

The long-run outlook stays bearish as discussed.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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