The Bank of Japan, as expected, announced overnight it will hold monetary policy steady. This came after the ECB's statement last month that it has a lot of ammunition left in its arsenal, effectively putting negative interest rates back on the table.
The U.S. Federal Reserve, too, was more dovish than expected yesterday, with eight of 17 Fed officials expecting it will be appropriate to lower the benchmark overnight rate by up to half a percentage point during the year. Traders are now pricing in a virtual certainty the U.S. central bank will cut rates by July, Fed fund futures show.
This has placed the Japanese yen at risk of strengthening, something confirmed by the currency's technicals.
The USD/JPY provided a downside breakout, completing a rising flag, bearish after the 1.8% drop in the previous sharp move over a span of just two days, forming the flag pole.
The plunge pulled the 50 DMA below the 100 DMA, demonstrating that price data was also weakening on a longer average scale recently. Before that, the 50 DMA found resistance by the 200 DMA, when the price began trading into a descending channel—a clearly marked range in which sellers and buyers pass the buck back and forth within a downtrend. The channel led to the completion of a double-top reversal on May 13, which it successfully tested on May 30.
A flag formation developed as investors paused to catch their breath after a sharp move amid concerns they may have gotten ahead of themselves. The flag had been rising as the demand at that level eagerly consumed all the supply, but found it overwhelming, as supply overran demand.
The downside breakout demonstrates how sellers lower their bids to find willing buyers. The move signals that the market has recalculated the value of the two currencies and still considers the pair overpriced, which suggests another leg in the downtrend.
Trading Strategies
Conservative traders should wait for a close below the January trough, followed by a return move that proves resistance with at least one long red candle engulfing a green or small candle of either color.
Moderate traders may be content with a close below the flag’s 197.83 low, indicating that all demand is gone. Then, they may wait for a return move for a better entry price, not necessarily for evidence of the pattern’s integrity.
Aggressive traders may short at will, relative to their ability to withstand a whipsaw back toward the pattern.
Trade Sample
- Entry: 108.00
- Stop-Loss: 108.50
- Risk: 50 pips
- Target: 106.50
- Reward: 150 pips
- Risk-Reward Ratio: 1:3