Big Decision for USD/JPY Bulls on Test of 123.193 – 123.643

The Dollar/Yen is trading flat on Monday after aggressive moves by the Bank of Japan (BOJ) to keep rates low sent the Japanese currency to its highest level in seven years.

The BOJ’s dovish signals may give traders a chance to drive down the Yen further, as prospects of steady policy tightening by the Federal Reserve widen the Japan-U.S. interest rate gap.

“The BOJ looks at inflation, not Yen moves, in guiding policy,” sources told Reuters.

At 09:58 GMT, the USD/JPY is trading 122.590, up 0.036 or +0.03%. On Friday, the Invesco CurrencyShares Japanese Yen Trust settled at $76.44, down $0.50 or -0.65%.

In other news, Friday’s U.S. Non-Farm Payrolls report didn’t move the needle much since it supported the notion that the U.S. labor market is strong enough to handle aggressive tightening by the Federal Reserve.

The Fed is expected to tackle inflation by lifting rates sharply. Fed funds futures have priced a near 4/5 chance of a 50 basis point hike next month and two-year yields are edging closer to 2.5%.

Buyers will have to decide this week whether to resume the uptrend by breaking out over a retracement zone, or shift momentum to the downside and head into a value area where buyers will likely be waiting.

Essentially, chasing the market higher or waiting for value is the issue.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through 125.101 will signal a resumption of the uptrend. A move through 114.651 will change the main trend to down. This is highly unlikely, but there is still room to complete a normal 50% to 61.8% retracement of the recent 16 day rally.

The minor trend is also up. A trade through 121.284 will change the minor trend to down. This will shift momentum to the downside.

The minor range is 125.101 to 121.284. Its retracement zone at 123.193 to 123.643 is the nearest upside target and potential resistance.

On the downside, the nearest support is a pair of retracement zones at 119.876 to 118.643 and 119.286 to 117.914.

Daily Swing Chart Technical Forecast

The direction of the USD/JPY on Monday is likely to be determined by trader reaction to 122.159.

Bullish Scenario

A sustained move over 112.159 will indicate the presence of buyers. If this move generates enough upside momentum then look for a surge into 123.193 – 123.643. Trader reaction to this zone will determine the short-term direction of the USD/JPY.

Aggressive counter-trend sellers could come in on the first test of this area. They are going to try to form a potentially bearish secondary lower top. Buyers are going to try to break out over this zone with sights set on a resumption of the uptrend.

Bearish Scenarios

A sustained move under 112.159 will signal the presence of sellers. The first downside target is the minor bottom at 121.284. Taking this out could trigger an acceleration to the downside with the first target a 50% level at 119.876.