USD/JPY Forecast: Signs of bull exhaustion near trendline hurdle

The USD/JPY is better bid on easing US-China trade tensions, however, a break above the long-term falling trendline resistance may remain elusive.  

As of writing, the spot is trading above 111.00 and the S&P 500 futures are up 17 points or 0.65 percent. The stock futures picked up a bid, pushing the USD/JPY higher as US Treasury Secretary Steve Mnuchin said the US trade war with China is "on hold" as Chinese and American negotiators set up a framework to address the trade imbalances.

The risk-on mood could spill over to Asian and European markets, which means the USD/pair could have a go at the long-term falling trendline resistance (drawn from August 2015 high and December 2015 high) of 111.15. However, the probability that USD will find acceptance above the trendline hurdle is low.

Weekly chart - trendline resistance is seen at 111.15

Daily chart

The pair created a doji candle on Friday, signaling indecision in the marketplace. When viewed against the backdrop of the recent rally from 104.63 (March low), Friday's doji indicates bullish exhaustion or indecision between the USD bulls.

Further, the daily RSI shows overbought conditions - currently at the highest level since May 2017.

Meanwhile, the US 10-year treasury yield created a bearish outside day candle on Friday, indicating the uptrend may have run out of steam. (USD/JPY and treasury yields are positively correlated).

View

USD/JPY will likely face rejection at the trendline hurdle and could retrace to 200-day moving average (MA) located at 110.18.

The 5-day MA and the 10-day MA are biased bullish (trending north), so dips to 110.18 or 110.00 will likely be short-lived. A weekly close above the trendline hurdle would signal a continuation of the rally from the March low of 104.63 and allow a sustained rise to 113.00.

An unexpected failure to defend the psychological support of 110.00 would signal a downside break of the rising channel and open doors to 108.65 (May 4 low).