USD/JPY Forecast: Trend line supp breached on Dow sell-off, risk reversals lose height

The Dollar-Yen pair fell to a low of 109.44 yesterday and extended sell-off to 109.29 in the Asian session today. The Yen rally could be attributed to -

• Dow dropped 274 points or 1.24%
• Renewed concerns among investors about Trump’s ability to push forward with the policy agenda
• News of a terror attack in Barcelona

Important observations

• The spot closed below the trend line sloping higher from April 17 low and June 14 low

Daily Chart

• The one-month 25-delta risk reversal dropped from -1.00 to -1.18. The decline indicates increased demand for Put options and adds credence to the bearish move seen over the last 24 hours.

Focus on the broader market sentiment

The data calendar is light; hence the spot remains at the mercy of the broader market sentiment. Signs of risk aversion in the European stock markets would push the US index futures into negative territory and yield sell-off in the Dollar-Yen pair towards 108.71 [Aug  low].

Bullish scenario: Rally in the risk assets could yield a break above 5-DMA stationed around 109.89, in which case the resistance at 109.92 [38.25 Fib R of 114.49-108.71] could be put to test. 

Watch out for the bearish continuation pattern

Weekly chart

• The inverted flag pattern was breached to the downside last week.
• The failure at the weekly 50-MA earlier this week, followed by a move back below the flag support is encouraging for the bears.
• A close today below the flag support would open doors for 106.38 [61.8% Fib R of June 2016 low - Dec 2016 high].