USD/JPY testing bear's commitments at a critical resistance

  • USD/JPY has reached a strong level of resistance with a confluence of a 61.8% Fibonacci and prior structure. 
  • US dollar flexing its muscles but the question now is how much of its strength is sustainable?

As per yesterday's analysis, USD/JPY has run to the 105.40/50s target. Fundamentally, the US dollar has a few things going for it which have come back to light.

Firstly, the Federal Reserve is now perceived as not being alone in terms of monetary easing.

The spread of the coronavirus throughout Europe raises prospects of such from the European Central bank and the Bank of England.

As a result, we are seeing widespread weakness in the CEEMEA currencies. There are prevailing concerns that governments across Europe may have to tighten restrictions to slow down the pace of coronavirus infections. 

Similarly, both the Reserve Bank of Australia and the Reserve Bank of New Zealand are leaning dovish with their pessimistic stances on the global and domestic economies, albeit on hold for the time being. 

Yesterday, Chicago Fed President Evans said the Fed could even raise rates before the 2% average inflation target was reached.

While this may have been taken out of context, it has been enough to help the dollar on its way for the meantime and break some stops above the 105 figure. 

Today, Evans has said, "it is unbelievably important to exceed 2% inflation for some time."

"Fed has indicated it will keep rates at the current level until inflation is sustainably at 2% and confident on track to exceed 2%."

Evans has confirmed, saying "will keep rates where they are until full employment, inflation gets to 2% and overshoots."

In other comments, Evans said, "setting of monetary policy is adequate now, will pivot to greater accommodation when needed...When additional bond purchases become important, no doubt the Fed will make them."

The comments took some little juice out of the dollar, momentarily but not enough to materially impact it and it is in fact now higher than where it was following the comments.

Deeper risks ingrained?

There could be a deeper risk ingrained in the markets that are supporting the greenback's rally as confidence is waning about the global economic recovery. 

The recent slide in the KRE index to the lowest levels since July rings alarm bells for the risk of an insolvency crisis, especially while there are still no headways being made at US Congress over another stimulus package. 

However, with the countdown to the US elections, USD/JPY is historically renowned to be a bull hedge leading into the fact and unwinding on the outcome. 

So, time to look at the technicals...

USD/JPY levels

From a technical basis, the pair is at a critical juncture.

USD/JPY has completed a 61.8% Fibonacci retracement of the daily bearish trend in a move that was expected and illustrated as such yesterday following the completion of a reverse head and shoulders pattern as follows:

Yesterday's analysis

And here we are

There are a few potential scenarios at this juncture:

a) a test of resistance and a continuation following a restest of what will then become support;

b) a test of resistance and failures to the new support structure for which if it holds, it offers the risk of a continuation;

c) a test of resistance and failures to the new support structure which also fails, rhyming with yesterday's forecast as follows:

There are still 7 days and 3 hours until the monthly close, but a monthly close below the 105.70 support will seal the deal for the bears and would coincide with the US election risk-off hedge.

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