USD/JPY rebounds from key support as dollar surges, yen demand falls

The US dollar surged on Monday after the euro took a hit earlier due to reports that German Chancellor Angela Merkel failed to form a coalition government, which markets immediately saw as potentially posing a risk both to Merkel’s position and to German/European political stability. After the news broke and the euro took a dive, the shared currency quickly found its footing once again. Further into Monday trading, however, dollar strength helped pushed EUR/USD back down to approach its lows of the day. Even more pronounced, however, was the strength of the dollar against the Japanese yen, which saw a lack of safe-haven demand as equity markets rallied once again on Monday. As a result, USD/JPY saw a substantial bounce from the key 112.00 support area.

Since nearly the beginning of the year, USD/JPY has been trading in a wide range spanning from around 108.00 to the downside to around 115.00 to the upside. Within this general trading range, there have been a few key support/resistance levels that have repeatedly served as key turning points for the currency pair. These levels include the 114.50 and 112.00 price areas.

Most recently, the past two weeks have seen both the US dollar and stocks falter as uncertainties over the timing and content of US tax reform plans weighed on markets. At the same time, the yen strengthened as these uncertainties helped fuel safe-haven demand for the Japanese currency. This combination of dollar weakness and yen strength was seen on the USD/JPY chart as a sharp pullback starting in early November from the noted 114.50-region resistance level, a price area from which USD/JPY has turned back down several times previously this year.

Currently, price has rebounded strongly from 112.00 support as the dollar has surged and yen demand has decreased once again. This 112.00 level is also around the 38% Fibonacci retracement of the bullish run from early September to early November, so a bounce from this level is technically significant. If USD/JPY is able to maintain its position above 112.00 support on US tax reform progress and continued monetary policy divergence between the Fed and Bank of Japan, a key range-trading target to the upside remains around the noted 114.50-area resistance.

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