USD/JPY may follow Nikkei’s big breakout after Japanese elections

Underscoring investors’ insatiable appetite for risk, Japan’s main Nikkei index rose for the 14th consecutive day, which was one the longest winning streaks ever recorded. The USD/JPY, which tends to rise and fall in tandem with stocks, also gained ground, helping the Dollar Index to break its two-day losing streak. In Japan, the focus will be on Sunday’s general election. Prime Minister Shinzo Abe’s party is favourite to win big. A win for Abe is seen as positive for stocks and thus the USD/JPY, but this may be fully priced in by now. Still, with the Japanese index breaking out of a major longer-term consolidation, the USD/JPY could follow it higher in the coming days and weeks.

As noted in my last article on the USD/JPY, on 11th October, I was looking for bullish technical signals to emerge on this pair. Specifically, I was looking for signs that the sellers were getting trapped after the recent rally off of the 107.50 area had paused around 113. Many speculators were probably looking at that bearish-looking doji candle that was formed two weeks ago as a sign that the long-term downtrend had resumed. While that could be the case, I still think that the recent trend of USD/JPY is bullish after the formation of that false break reversal at 107.50 key support. So, I still think that the USD/JPY may be poised for a potential bullish breakout rather than a breakdown.

Indeed, this week’s technical indications point that way. For one thing, the highs from the previous two weeks have been taken out. Thus, one of the bears’ main arguments that price would fall after the formation of that bearish-looking doji candle is now void. It is likely that some of the sellers that got in the USD/JPY on the back of that weekly candlestick pattern are now out of their positions. What the bulls need now is a clean break above 113.45 level, which would then pave the way for a potential rise towards the next pool of liquidity above the 114.35 area.

The invalidation for the above bullish scenario would be if price now goes back below old resistance levels at 112.80/5 and 112.30/5. If so, we could see a pullback towards the next support around the 111.00 area next. Even then, my long-term bullish view would not necessarily become invalidated, but we will obviously have to reassess the situation if and when we get there.

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