USDJPY eyes up a 3-month bullish reversal

The threat of inflation and Fed hikes has pushed US yields higher and, for now at least, we’ve seen the return of the positive correlation with the US dollar. In doing so USDCHF has broken out from between a rock and a hard place, EURUSD and AUDUSD broke their long-term bullish trendlines and, not wanting to miss out NZDUSD threw itself from the top of a tall building. Well, now USDJPY wants in on the action.

It was the US 10yr push for 3% which finally saw USDJPY perk up and break above 108 on Monday. With a 1% range it was its most volatile session in four weeks, made more compelling by the fact it broke key resistance and blew out of a 2-month basing pattern.

Ultimately, we remain bullish on USDJPY but Monday’s parabolic break above 108 has pushed USDJPY above the upper Keltner band for a fourth session (so far). If this is to be met with signs of exhaustion, the potential for a retracement grows. But it’s interesting to note that yesterday’s range expansion closed above Tuesday’s Doji which is likely enticing to bullish intraday traders. But if you prefer to enter on the daily timeframe, we suggest you question whether the reward is worth the risk given how extended the move is.

The 110.12/47 highs make for a likely target given they are a key structural level. And if we are to see a break of 110.47 (February’s high) JPY would then be trading above a monthly morning star reversal pattern.

The monthly chart is coiling and, even if any upside break were capped by the upper trendline there’s still potential for 250-280 pips headroom. For now we’ll step aside as the BOJ meeting is tomorrow and, even though odds of a change of policy are minimal, they have been known to throw in a surprise or two over the years. But if following the event the technical picture allows, perhaps we can try to capitalize on a bullish trade.