USD/JPY has been one of the latest entries into my higher frequency watchlists after the price failed to make a substantive new higher low on Jul. 22. As a result, I’m more vigilant for possible signs of reversal and see some pretty big risks buying ahead of Wednesday’s Fed decision.
I’m worried that either the Jun. 21 high of 136.710 or the Jun. 29 high of 137.005 mark the first shoulder in a yet-to-be-formed head and shoulders pattern or set the path toward a double top or triple tip formation. RSI divergence between the Jun. 14 swing high of 135.495, and the subsequent Jul. 14 swing high of 139.394 also adds to my newfound caution.
Waiting For A Catalyst
Still, enough evidence suggesting USD/JPY has reached its peak is lacking. Granted, down by c. 19% against the US dollar year to date, the Japanese yen has been the worst performing currency, but that alone doesn’t mean it is ripe for a reversal.
Most fundamental conditions that have led the pair higher haven’t shifted; aggressive Fed tightening vs. ultra-loose monetary policy from the BoJ persists, as do high energy prices and fears of a global recession. In my opinion, the fundamental catalysts needed to reverse the yen’s fortunes, although brooding, have yet to appear.
Key Levels To Be Broken
Likewise, the price is still well above its 200-day exponential moving average. This makes me cautious of being too bearish on USD/JPY, even if the gap between the current price and the moving average looks extreme. Were the price to break below 135, underpinned by decent volumes, I might become more convinced that USD/JPY’s fortunes have taken a shift for the worse.
Even more substantive would be a sustained break below the 131.50 level. At the moment, we are still a long way off from that level.