Is the USD/JPY Rally Done?

US Dollar, Japanese Yen, USD/JPY – Technical Outlook:

• USD/JPY has broken below a crucial support area.

• The fall indicates that an interim top could be in place.

• How much more downside for USD/JPY, and what are the key levels to watch?

USD/JPY SHORT-TERM TECHNICAL FORECAST – NEUTRAL

The break below key support on Thursday has taken the sting out of the USD/JPY rally. In all likelihood, a near-term top could be in place. Does the question then arise to what extent it could correct lower?

USD/JPY hit a 32-year high of 151.94 on 21 October, taking year-to-date gains to over 30%, before the Bank of Japan reportedly intervened for the second time this year (policymakers were said to step in on 22 September for the first time since 1998). On Thursday, the pair fell below horizontal trendline support at 145.00-145.90, confirming that upward pressure has faded in the short term.

USD/JPY Quarterly Chart

Chart Created Using TradingView

Since the start of this month, this column has highlighted the possibility of a pause in USD/JPY’s multi-month rally as it tested major resistance on longer-term charts. Most recently, a warning was issued that the odds of a break below 145.00-145.90 were growing.

USD/JPY is now at an important juncture: a horizontal trendline from July, at about 139.50, including the 89-day moving average. The last time the pair was below the 89-day moving average was in early 2021, so a break lower would be bearish. There are two scenarios that could play out in the short term.

USD/JPY Daily Chart

Chart Created Using TradingView

The first scenario is where USD/JPY’s downside is limited, and it turns up from near 139.50. This wouldn’t be surprising as the pair rebounded in August under similar conditions (see chart). Momentum on intraday charts remains down, pointing to the reduced possibility of an imminent turnaround. The pair could briefly fall toward 137.00-138.00 before finding a floor. Given the strength of the uptrend from a medium-term perspective, the odds are high of this scenario playing out.

The second scenario is a relatively bearish case. USD/JPY could fall all the way toward the 200-day moving average (now at about 132.75), but may not be able to crack the August low of 130.40.

— Written by Manish Jaradi, Strategist for DailyFX.com