USD/JPY testing critical trendline resistance, bullish 110.80 / bearish 108.50 levels eyed

USD/JPY is attempting a break of the psychological 110 figure and has printed a high on the day of 110.08 so far.

USD/JPY has travelled from a low of 109.58 to move into a flat position compared to the start of the week's range. 

It has been a choppy start to the week considering month-end flows and there was a push higher ahead of the London fix.  

In recent trade, the greenback rallied further to test 92.75 and US yields have popped higher as well to 1.3140% in the 10-year. 

Traders are still digesting the rhetoric from the Federal Reserve and the bond markets are paining the money markets foresight currently.

The dollar reached hit its lowest level in more than three weeks against a basket of currencies earlier in the day while investors await US jobs figures later this week.

Traders are looking for insight into the possible path of US Federal Reserve monetary policy and that puts US data as top priority.   

The DXY index dropped to a low of 92.403 in London trade, its lowest level since Aug. 6 but is still up nearly 0.5% for the month.

There is a focus on the European Central Bank and the convergence between it and the Fed. 

Inflationary pressures in the Euro Area were the focus, with the flash CPI estimate for August coming out hotter than expected, (3% vs 2.5% exp and 2.2% prior), sinking the DXY.

ECB’s Philip Lane was concrete at the Jackson Hole, basically, promising to calibrate the QE program to financial conditions BOTH in an upwards and in a downwards direction.

This currently means that the recent new all-time lows seen in EUR real rates could be used as an argument to tone down PEPP-purchases, potentially as soon as September.

Should sentiment grabbing the front pages be construed as the equivalent of a taper, then this would be expected to continue to weigh on the greenback as the Fed simultaneously dials down its hawkish stance.

Meanwhile, USD/JPY sank to a low of 109.58. The 10-year US yield fell shortly after to session lows, 1.27%.

USD/JPY is correlated to yield spreads and prospects of a lower US dollar is pressuring the inflation outlook with US yields responding in kind. 

The 10-year yield on US Treasuries declined into a familiar area of daily horizontal support and resistance which has been defended on Tuesday in the aforementioned lows. This is the last defence before 1.2210% support and prospects of a downside breakout, (see below).

The US dollar has struggled since Federal Reserve Chair Jerome Powell's said that there is an explicit disconnect between lift of and tapering and that there was in no hurry to raise interest rates nor to taper.

This has left the focus on US data in the run-up to the next Fed meeting later this month. 

Tuesday has been the first day of significant data releases for the week ahead of the showdown this Friday in the highly anticipated Nonfarm Payrolls event. 

Fed Chairman Jerome Powell made very clear, again, that while the Fed has probably got to the point where “substantial further progress” has been made on inflation “we have much ground to cover to reach maximum employment”.

Despite a solid S&P/Case-Shiller Home Price Indices for June YoY, the US dollar was softer on the back of the combination of a weaker-than-expected Chicago PMI for August the Conference Board's reading for consumer confidence that fell short of expectations.

 Wednesday's Manufacturing PMIs as well as the ADP jobs report and then Jobless Claims also have the potential to stir up volatility before Friday's showdown. 

''If the outlook changes and the US economy slows significantly, then it would be a likely game-changer for the dollar,'' analysts at Brown Brothers Harriman warned.

''The Fed would have no choice but to adjust its expected tapering path significantly. Yet even then, the dollar may hold up better than expected since a US recession would likely be part of a broader global downturn. It all goes back to relative performances.''

 In terms of what to expect,  Deutsche Bank US economists think that ''the pace of hiring will slow somewhat after the strong report in July, but the +700k increase in nonfarm payrolls that they’re forecasting should be more than sufficient to keep the Fed on track to announce tapering at the November FOMC meeting. In turn, that jobs growth should see the unemployment rate fall to a fresh post-pandemic low of 5.2%.''

Meanwhile, considering the bulls failed to close above 93.50 last week nor for month-end, should the data really disappoint, the DXY could be looking into the abyss from a longer-term perspective:

USD/JPY technical analysis

Firstly, the 10-year yields are pressured to dynamic trendline support.

This could also be considered as neckline support of the head and shoulders.

But should the yield break below this support it will face 1.2210 as the first horizontal support as the last defence of the double bottom lows:

On the upside, US dollar bulls will be looking for a solid outcome in the data this week resulting in a move higher towards the trendline resistance in the 10-year yield.

This would be a supporting combination for USD/JPY. 

USD/JPY bulls will be looking to break the 110 level and in doing so, a break out of the wedge formation to target 110.80:

Failing a bullish scenario for the US dollar, the 200-day EMA near 108.50 will be the focus: