USD/JPY Forecast: Sustained move beyond 110.00 would set the stage for further gains

The USD/JPY pair caught some fresh bids on Tuesday and recovered a major part of the previous day's losses to the 109.00 neighbourhood, or near two-month lows. As investors assess the economic impact of the fast-spreading Delta variant of the coronavirus, a dramatic turnaround in the risk sentiment undermined the safe-haven Japanese yen. This was seen as a key factor that triggered the initial leg of the intraday positive move. Bullish traders further took cues from a solid rebound in the US Treasury bond yields, which pushed the US Dollar Index to the highest level since early April.

In fact, the yield on the benchmark 10-year US government bond reversed an intraday slide to more than five-month lows and climbed back above the 1.20% threshold. On the economic data front, US Building Permits dropped 5.1% MoM to a 1.598 million annualized rate in June. Separately, Housing Starts rose 6.3% MoM to 1.643 million annualized pace during the reported month. The mixed housing market data, however, failed to provide any meaningful impetus to the major. Nevertheless, the pair settled near the top end of its daily trading range and traded with a mild positive bias during the Asian session on Wednesday.

A generally positive risk tone, along with dovish comments by The Bank of Japan (BoJ) Deputy Governor Masayoshi Amamiya, acted as a headwind for the JPY and remained supportive. Amamiya warned that the risks to the Japanese economic outlook remain skewed to the downside and that it will take time to achieve the price stability target of 2% inflation. He added that sluggish inflation makes it necessary for the BoJ to persistently continue to conduct powerful monetary easing. This, to a larger extent, offset a jump in Japanese exports in June, which boosted hopes for an export-led recovery.

Moving ahead, there isn't any major market-moving economic data due for release from the US on Wednesday. Hence, developments surrounding the coronavirus saga will drive the broader market risk sentiment and the safe-haven JPY. Traders might further take cues from the US bond yields, which will influence the USD price dynamics and produce some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the pair this week showed some resilience below 100-day SMA and the subsequent positive move favours bullish traders. Some follow-through strength beyond the 110.00 mark, representing the 38.2% Fibonacci level of the 111.66-109.07 recent leg down, will reinforce the positive outlook. The pair might then accelerate the momentum towards the 50% Fibo. level, around the 110.35 region, en-route the 110.65-70 area, or the 61.8% Fibo. level. Sustained strength beyond has the potential to push the pair further beyond the 111.00 mark and allow bulls to retest monthly swing highs, around the 111.65 region.

On the flip side, the 23.6% Fibo. level, around the 109.65 region, now seems to protect the immediate downside. This is closely followed by 100-day SMA, currently near the 109.50-45 area, which if broken decisively might be seen as a fresh trigger for bearish traders. The pair might then turn vulnerable to challenge the 109.00 mark before eventually dropping to the next relevant support near the 108.65 region.