Key Points:
- The pair could make back some modest ground over the coming sessions.
- Our technical bias remains bullish on a number of fronts.
- Comey saga is still worth bearing in mind.
The dollar yen has slowed the pace of its recent downtrend and, in fact, it has actually begun to recover modestly. However, given the ongoing Trump/Comey saga, the fundamental outlook isn't looking so hot for the pair which means we may have to turn to the technical bias for guidance.
First and foremost, the technicals largely indicate that we can expect to see some (if not a lot of) upside action in the near-term. This comes primarily as a result of the medium-term pennant structure that has kept price action contained over the past number of weeks. Specifically, the dollar yen’s recent retreat has brought it into conflict with the downside of the pennant which would typically necessitate at least a modest recovery moving ahead.
Furthermore, whilst they have trended out of oversold territory, the stochastics should put a dampener on any additional attempts to push the pair lower in the immediate future. This is largely due to the fact that the oscillator is still flirting with that key 20.0 level which should act as a deterrent to any bears seeking to spark another sell-off.
Another deceptive technical reading that, on the face of things, looks particularly bearish but is actually rather bullish is the parabolic SAR. As shown, if the USD/JPY can advance above the 110.40 mark over the next few sessions, the currently bearish indicator will invert — typically a signal that a decent shift in momentum has occurred.
Once the upswing has begun, we expect to see the pair climb to around the 112.00 handle before encountering significant resistance. At this level, the joint influence of the 38.2% Fibonacci retracement, the 100 day EMA, and the central tendency of the overarching structure should present a rather difficult obstacle for the bulls to overcome. What’s more, the pair is already likely to be battling against fundamental headwinds which could mean that this is a medium-term cap on gains.
Ultimately, this forecast is somewhat contingent on the market’s ever unpredictable response to Trump-related drama. However, given the rather sedate reaction to Comey’s scathing testimony, we may have to wait for the case to progress before traders begin to act on the news. In the meantime, the technicals have a fairly firm bias suggesting that some buying pressure is now warranted which could see the pair end the week on a high note.