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USDJPY on Thin Ice Ahead of FOMC

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Since coming off last year’s high – which was telegraphed by the fifteen-month head and shoulders pattern – USDJPY is currently down more than 2,000 pips.

For those who read my cautionary post from January, this shouldn’t have come as a surprise.

What was concerning at the time of that commentary was how the head and shoulders had formed after an unprecedented 5,000-pip rally from the 2011 low. And aside from some consolidation in 2013 and 2014, there hadn’t been much in the way of a healthy pullback.

We had all of the ingredients for a massive drop.

Two weeks later, the yen rocketed higher on mounting global concerns, and we had our break below the neckline at 116.00. Profits were booked 12 weeks later at the 106.00 measured objective.

USDJPY head and shoulders pattern on the weekly chart

With the backdrop set, let’s discuss where USDJPY might go from here.

While we don’t have a momentous reversal pattern like we had in January, we do have two distinct levels that could dictate future price action. One of them, in fact, has already done so.

The 105.54 handle served as support in early May and once again attracted a bid during yesterday’s session. Also, you can see from the chart above that this area is the 2013 high.

So now that we have our line in the sand, so to speak, things become relatively straightforward. A daily close below 105.54 would signal that weakness is likely to prevail, ultimately exposing the 100.80 handle.

Why 100.80?

Because it’s the 2014 low and also the 50% Fibonacci retracement when measuring from the 2011 low at 75.55 to the 2015 high at 125.85.

Like any directional move, a break below 105.54 would see its share of bumps along the way toward 100.80, but there wouldn’t be much standing in the way of a retest of the 2014 low.

As for a catalyst that might cause a break, how about FOMC today at 2 pm EST?

Now, I’m not implying that the event will trigger a selloff in USDJPY as nobody knows what the future holds. However, it does serve as a catalyst that could single-handedly produce a technical break.

And if FOMC fails to do so, there is a myriad of other global concerns lurking in the shadows. In my opinion, it’s only a matter of time before one of them triggers another bout of global panic, causing market participants to flock to the safety net called the Japanese yen.

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USDJPY key support levels on the daily chart

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2 comments
Marc says

Hey Justin
Great analysis.
Are you taking into account the downward sloping flag starting from about 5 June? This looks like a reversal at support if it holds. I favourite the technicals so have little in the way of fundamental analysis to add or comment on.
Regards

Reply
    Justin Bennett says

    Thanks, Marc. I think yesterday’s session answered this one. 🙂

    Reply
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