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USD/JPY hits key level ahead of FOMC

Along with the US equity markets, the USD/JPY has been rallying sharply in recent weeks. But Ahead of the FOMC’s policy meeting in midweek and due to technical reasons, we wouldn’t be surprised to see a pause in the bullish trend around the 116/117 area. Overall though, the dollar remains well-supported and any weakness could very well turn out to be temporary. The Fed will most likely hike interest rates by 25 basis points on Wednesday as widely expected, but the dollar may be able to rise further if the expected rate rise is accompanied by a more hawkish-than-expected policy statement or remarks from Janet Yellen at the FOMC press conference.

Turning our focus to the charts and we can see that the USD/JPY has now entered the 116/117 resistance range, which was the last key support prior the breakdown that took place in February.  Given the sharp rally into this importance level, a short-term pullback should not come as a surprise.

In addition to this 116.00 level being previously support and now resistance, it also corresponds with the measured move objective of the triangle breakout, as per the chart. What’s more, price has reached the 61.8% Fibonacci retracement level against the last major swing high. Furthermore, it is worth mentioning the fact that the momentum indicator RSI has climbed above the ‘overbought’ threshold of 70 and is now in a state of negative divergence, making a lower high compared to the higher high on the underlying price action.

Thus for all these technical considerations, profit-taking from the bulls and some opportunistic selling from the bears could provide some pressure on the USD/JPY in the early part of this week.

However, as mentioned, the bullish trend does look quite strong and so far no break in market structure has been observed. Therefore, it is imperative to pay a lot of attention to the initial levels of support now to gauge the strength of the market. On the daily time frame, the first potential level of support is at 114.80. However if this level breaks down then the selling pressure may grow rapidly. In this case, we may see 114.00 or who knows even 111.35 before price makes its next move.

Meanwhile if and when the key 116/117 resistance area is cleared then we may see a move towards the next resistance at 118.80 and potentially beyond over time. But to get us there, the bulls may require some assistance from a hawkish Fed in midweek and maybe a more dovish-than-expected BoJ the week after. 

Source: eSignal and FOREX.com.

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