USD/JPY Forecast: Prepping for corrective rally

Omkar Godbole FXStreet Contributor

The odds are stacked in favor of a corrective rally in USD/JPY, technical charts indicate, although Wednesday's US CPI release could play spoilsport.

Monthly chart - defends long-term rising trendline

On Friday, bears failed to cut through the trendline sloping upwards from the 2011 low and August 2016 low. Also, the pair created a doji candle at trendline support as seen on the daily chart below.

Daily chart - doji

Doji at the long-term trendline support indicates indecision in the market ahead of the all important US CPI release. When viewed against the backdrop of the recent slide from 113.39 (Jan. 8 high), the doji candle and the defense of the long-term trendline signals bearish exhaustion.

This, coupled with a rebound in the US equities could lift USD/JPY above 109.00 levels. A positive close today, preferably above 109.00 would confirm the bull doji reversal and open doors for 110.48 (Feb. 2 high). A move to 110.48 or above looks likely on the back of strong US inflation numbers (this Friday).

That said, the spike will likely be short-lived as equities could turn risk averse in response to pick up in yields (after inflation release).

On the other hand, a big miss on the CPI may push USD/JPY lower towards 107.32 (September low), although it will likely turn out to be a bear trap as the decline in the treasury yields may help restore risk appetite in equities.

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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