USD/JPY Price Analysis: Faces rejection near 139.00 mark, bullish potential intact

• USD/JPY gains traction for the second straight day and climbs to its highest level since mid-July.
• The risk-off impulse offers support to the safe-haven JPY and caps any further gains for the pair.
• The Fed-BoJ policy divergence, sustained USD buying, rising US bond yields favour bullish traders.
• Sustained break through the 136.65-136.70 resistance zone adds credence to the positive outlook.

The USD/JPY pair stalls its intraday positive move near the 139.00 mark and retreats a few pips from the highest level since mid-July touched earlier this Monday. The pair slips back below mid-138.00s during the first half of the European session, though any meaningful pullback still seems elusive.

The risk-off impulse offers some support to the safe-haven Japanese yen and acts as a headwind for the USD/JPY pair. That said, a big divergence in the monetary policy stance adopted by the Fed and the Bank of Japan should cap gains for the JPY. Apart from this, the blowout US dollar rally to a fresh 20-year high and rising US Treasury bond yields should help limit the downside for the major.

From a technical perspective, the strong follow-through buying for the second successive day on Monday confirmed a breakout through the 137.65-137.70 resistance zone. This comes on the back of the recent strong bounce from the 100-day SMA and favours bullish traders. Hence, any subsequent downtick might be seen as a buying opportunity and is likely to remain limited, at least for the time being.

Nevertheless, bullish momentum is waning with each drive higher during the summer, suggesting buying pressure may lack oomph. This is clearly seen on RSI(14) on the daily and weekly charts which is making lower highs with the cumpletion of each upswing – a phenomenon known as bearish divergence. This raises the risk of a correction occurring. In such a scenario, traders will look to the 138.00 round-figure mark to offer some support ahead of the aforementioned resistance breakpoint, around the 137.70-137.65 region. A convincing break below might trigger some technical selling and accelerate the slide towards the 137.00 mark. The USD/JPY pair could eventually drop to the 136.80-136.75 intermediate support en route to the 136.45 support zone.

On the flip side, the 139.00 round figure now seems to have emerged as immediate resistance. This is followed by the 24-year high, around the 139.40 region touched in July, which is also around the endpoint price target for the 61.8% extension of a second leg of a possible bullish flag pattern that fmay have formed on the daily chart during August. Some follow-through buying has the potential to lift the USD/JPY pair further towards the 140.00 psychological mark, which if cleared decisively should pave the way for a further near-term appreciating move.

USD/JPY daily chart

Key levels to watch