USD/JPY forecast: Treasury yields play spoilsport

USD/JPY looked poised for a bullish move above the recent high of 112.17 yesterday, having bounced up from the ascending trendline support in the Asian trading hours.

The breakout, however, remained elusive even though the Dollar gained ground against most major currencies. EUR/USD fell to three-week lows on Tuesday, while Gold printed a four-month low of $1,266. USD/JPY, however, remained below 112.00 and is currently trading 111.81, having hit a high of 111.98 earlier on Wednesday. 

The Australian Dollar tanked in the Asian session on Wednesday following the dismal Aussie first-quarter inflation release at 01:30 GMT. That too failed to put a bid under USD/JPY and so did the decline in the AUD/JPY cross. 

The USD/JPY pair is struggling to find takers, possibly due to the weakness in the treasury yields. The 10-year yield fell two basis points on Tuesday even though the US New Homes Sales came out 692K annualized, bettering market expectations to show the housing sector is recovering from the temporary slowdown. 

The stocks also traded in the green on Tuesday, with the S&P 500 closing at record high levels. The risk on also failed to lift treasury yields. 

10-year treasury yield

As seen above, the upper edge of the falling channel pattern is proving a tough nut to crack since April 17.  More importantly, the repeated rejection could be followed by a pullback, in which case, USD/JPY will likely drop to the recent higher low of 110.84, as created on April 10. 

USD/JPY daily chart

The weak follow-through to the defense of the ascending trendline seen in the Asian session on Tuesday has weakened the bullish case and shifted risk in favor of a drop below the previous day’s low of 111.65. Acceptance below that level would expose the recent bullish higher low of 110.84. 

The bullish view put forward by both the rising trendline (higher lows) and the upside break of the bearish expanding channel seen on April 11 would be reinforced if the pair jumps above 112.17 in the next 24 hours. That could be followed by a rally to 113.00. 

The bullish break above 112.17, however, needs to be backed by a falling channel breakout on the US 10-year yield, else the move above 112.17 may end up trapping buyers on the wrong side of the market.