USD/JPY faces a potential drop to 107.70/50 – UOB

Spot remains under pressure and could extend the decline to the 107.70/50 band, suggested FX Strategists at UOB Group.

Key Quotes

24-hour view: “We expected “more USD weakness” last Friday but the ease of which it cracked the solid 109.00 support and the subsequent sharp sell-off came as a surprise. The outsized decline appears to be running to fast, too soon and while a test of 108.00 is not ruled out, the prospect a sustained decline below this level is not high. All in, USD is expected to stay under pressure unless it can move back above 108.65. The next resistance at the ‘break-down’ level of 109.00 is not expected to come into the picture, not only for today but also for the next couple of days”.

Next 1-3 weeks: “We indicated last Friday (31 May, spot at 109.40) that “looking ahead, the current consolidation is expected to be resolved by a downside break but 109.00 is a solid support and this level may hold for a while more”. We added, “if USD were to register a daily closing below this level, it would indicate the start of a sustained decline to 108.45 (and possibly lower)”. However, the subsequent price action came as a surprise as it played out in a ‘fast-forward’ manner as USD sliced through 109.00 and plunged to 108.26 (before closing right at the low for a loss of -1.22%, the largest 1-day decline in 2 years). In other words, USD has moved into a ‘negative phase’ even though the decline appears to be running ahead of itself. That said, there is scope for the weakness to extend to 107.70 (there is another strong support at 107.50). On the upside, only a move above 109.30 would indicate that the current weakness has stabilized. Shorter-term, 109.00 is already a formidable level”.