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USD/JPY path of least resistance still to downside

The Dollar Index (DXY) gapped lower overnight as the outcome of the French election underpinned the euro, which makes up a big portion of the index. Despite the DXY’s weakness, the USD/JPY gapped higher as the news also undermined perceived safe haven assets such as gold and yen. But the gains for the USD/JPY were short-lived and the daily chart of the USD/JPY is currently displaying a bearish price pattern, which suggests that the gap may well be ‘filled’ completely in due course and there may even be a possibility for a deeper pullback.

As can be seen from the chart, the USD/JPY is in the process of potentially forming an inverted hammer candlestick formation after the gap up. This price pattern is typically bearish as it highlights a lack of willingness from the buyers to hold onto their positions. Thus, we may see some weakness follow-through in the upcoming Asian session.

But the USD/JPY has recently completed an AB=CD move and has climbed back above its 200-day moving average. Thus, the bears will need to chop some wood if we are to see new lows for the year soon. Specifically, they will need to push the USD/JPY beneath old resistance, now potentially support, at around the 108.90-109.45 area. If successful, we may then see an eventual drop towards the long-term 61.8% Fibonacci retracement level and prior long-term resistance at around the 106.50-80 area.

In term of resistance, the 110.50 level is now the key hurdle for the bulls. If we break though this level decisively then there’s nothing significant on the way up until 111.55, followed by the top of the bear channel around the 113.00 area.

But taking everything into account, I do think that the path of least resistance is still to the downside. I may change my view if the USD/JPY shows significantly bullish characteristics, like a reversal formation around a key support area such as around the 106.50/80 region. But there’s no such sign yet.

Source: eSignal and FOREX.com.

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