USD JPY takes a breather but bullish trend still intact

Since reaching a new 8-month high just short of major technical resistance around 114.00 late last week, USD/JPY has pulled back modestly as the dollar has tentatively paused its relentless rally and the yen has made a small rebound within its equally relentless fall.

The dollar remained flat to moderately negative overall on Monday as its precipitous rise of the past three weeks was subject to consolidation and profit-taking. Also taking a corresponding breather were retreating bond yields, which took some upward pressure off the dollar.

What has not changed since last week, however, are high expectations that the Federal Reserve will raise interest rates after its next meeting in two weeks. Market expectations for a 25-basis-point rate hike at this meeting are currently running at an exceptionally high 98%. Now, the big question is less about whether the Fed will raise interest rates in December, and much more about what the pace of rate hikes may likely be after December, especially with Trump-driven inflation expected to rise. Therefore, while pullbacks are to be expected within the dollar’s continued climb, the greenback remains well-supported by anticipation of increasing interest rates.

As for the Japanese currency, a persistent “risk-on” market environment after early-November’s surprise election outcome has helped to put pressure on the safe-haven yen. Rising stock markets have severely diminished the appeal of safe-havens like the yen and gold, which have both seen precipitous drops in value within the past few weeks.

The trajectory of both the dollar and yen can be most readily seen on the USD/JPY daily chart, which has surged sharply to hit and break out above major resistance levels during the month of November. As noted, the culmination of this rise thus far has been a high just short of the key 114.00 resistance level on Friday, which is also a major 61.8% Fibonacci retracement level. Since that high, the currency pair has pulled back modestly, hitting a low in the 111.00’s on Monday before bouncing.

Despite this retreat from its highs, USD/JPY continues to appear poised for more upside, given the well-supported dollar and persisting pressure on the yen. This should continue to be the case as long as the key 111.00 support level is not breached to the downside. In this event, the upside level to watch continues to be the noted 114.00 level. Any successful break above 114.00 should open the way towards further upside targets at the major 116.00 and 118.00 resistance levels. The upcoming US jobs report on Friday should also play a key role in determining whether or not such a breakout occurs in the near-term.