USD/JPY Forecast: Watch out for higher bottom formation

The US Department of Commerce will publish its first estimate of US economic growth in the first quarter of 2017 and it may show the economy barely grew.

The markets are expecting GDP to print at an annual rate of 1.3%. However, the Atlanta Fed’s widely followed GDPNow tracker, which aggregates model forecasts for several subcomponents of GDP like exports and home building, shows economy likely expanded at just a 0.2 percent annualised pace in the first quarter.

The latest first-quarter gross domestic product growth estimate was slower than the 0.5 percent rate calculated on April 18 and an initial expectation of 2.3 percent on Jan. 30, the Atlanta Fed said.

A better-than-expected GDP figure would push up Treasury yields and result in a higher bottom formation on the USD/JPY long duration charts.

The June Fed rate hike probability currently stands at 68%, which is well above the 60% mark which is what the Fed usually wants to see before pushing the rates higher.

A weak GDP release could push the USD lower; however, the weakness could turn out to be short lived, if the June rate hike probability holds above the 60 % mark.

Technicals

Monthly chart - RSI could turn higher from neutral level

• A sharp recovery from the low of 108.13 in the wake of a rising 50-MA and the golden cross (bullish crossover between 50-MA & 200-DMA) suggests the potential for an extension of a rally to 113.99 levels (23.6% fib retracement of 75.56-125.856).
• Note that a move higher would pull up the RSI into the bullish territory from the neutral level. That would only add credence to the higher bottom formation.

Weekly chart - higher bottom established

• Last week’s rebound from the weekly 50-MA has been extended this week, thus a higher bottom has been established…
• However, the RSI remains below 50.00.
• So we wait for a break above the descending trend line (coming from Dec high and Mar high) before turning bullish on the pair. The trend line is seen offering resistance around 113.00 levels.
• On the downside, only a weekly close below 108.13 would signal continuation of the sell-off from 118.66 levels.

Daily chart - Falling channel, bullish RSI

• The RSI has breached the falling trend line and currently sits above 50.00 levels.
• However, only a break above the 50-MA level of 111.74 would add credence to the bullish RSI and open doors for 113.34 (100-DMA).
• On the downside, only a break below 108.13 would revive the bearish view.

To conclude -  A higher bottom formation appears more likely on the monthly chart. Take note of the inverse head and shoulder pattern on the monthly chart as well. On a larger scheme of things, bears are seen regaining control of the pair only below 108.13 levels.