USD/JPY: Bearish argument towards 109 on failures to break through 110.16 highs

• USD/JPY is tucked in below the 110 handle, but on the third attempt of a break of the figure, a bearish continuation triangle set up would be put into jeopardy above 110.30. 

Overnight, USD/JPY probed under 109.60 but then recovered to near 110.00, about flat over the day as investors stay long of equities despite a negative close in the indices. There was a lack of pivotal drivers overnight which meant Trump's failure to impress the corporate complex in his State of Union address the previous day which offered little in the way of details on his economic agenda. 

However, the greenback made broad-based gains despite there being no obvious catalyst. The US 10yr treasury yield was net flat around 2.70%, likewise 2yr yields at 2.52%. The market is of the opinion that the Fed will not be hiking for the meanwhile and is data dependent, hence the dollar was broadly in demand following the recent bullish stew of ISM and nonfarm payrolls data. Secondly, given that other central banks are perceived a touch more dovish than the Fed, the dollar remains in vogue while the economy remains robust in light of the potential global systemic risk factors to the U.S. economy, such as a slowdown in China weighing on emerging market sentiment, Brexit and widespread global debt. 

Fed on hold

Analysts at Westpac noted that the futures markets continue to price little chance of any further Fed rate hikes in this cycle, with a 10% chance of a hike in December and a 5% chance of a cut. "Former Fed chair Yellen said US data was strong but she was open to the next move on benchmark interest rates being in either direction."

USD/JPY levels

The pair has been forming a bearish continuation triangle since recovering from the flash crash lows at the start of this year. A break of the 109 handle to the downside could seal the fate of USD/JPY for the foreseeable future. Long term bearish play would target the 105 handle. The 105 target is based on the distance between the lowest and highest points of the base of the triangle. On the flip side, a break of 110.30 throws the bearish formation into jeopardy. However, there has been a significant drop in volume which decreases the likelihood of a surge through the figure and builds the case for a bearish retracement within the triangle formation. 

Meanwhile, Valeria Bednarik, Chief Analyst at FXStreet explained that the technical readings in the 4 hours chart indicate that, despite the lack of bullish momentum, there's no selling interest around the pair, as it is developing above its 100 and 200 SMA. "The RSI indicator gains upward traction after testing its mid-line, heading higher at around 60. The upside will look more constructive if the pair breaks above 110.16, this year high."