USD/JPY Forex Technical Analysis – Held 103.496 Support But Needs Higher US Rates to Resume Rally

The Dollar/Yen is edging lower early Wednesday as a pullback in U.S. Treasury yields pushed the dollar below 104 Japanese Yen in Asia though moves were slight as dollar bears’ conviction wavered.

The dollar started to weaken on Tuesday as a retreat in U.S. Treasury yields sucked the upside momentum from its recent technical rebound that changed the trend to up after a prolonged break. The price action, however, suggests investors are cautiously resuming bets that the greenback is poised to continue its recent price slide.

At 07:54 GMT, the USD/JPY is trading 103.644, down 0.099 or -0.10%.

The weeklong rally in the Dollar/Yen was primarily driven by a widening in the spread between U.S. Government bond yields and Japanese Government bond yields. The move made the U.S. Dollar a more attractive investment. This is known as trading the yield differential.

Trading the yield differential was very popular prior to the start of the pandemic when U.S. rates were much higher than Japanese Yen rates. Since the Fed lowered rates to near zero, the trade has been nearly non-existent. However, the surge in Treasury yields has investment professionals debating whether we’re going back toward trading the interest rate differentials.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. A trade through 104.398 will reaffirm the uptrend. The main trend will change to down on a move through 102.593.

The minor range is 102.593 to 104.398. Its 50% level at 103.496 is currently being tested.

Any rally is likely to be labored because of a series of retracement level resistance at 104.135, 104.499 and 104.821. The USD/JPY starts to open up to the upside on a sustained move over 104.821.

Daily Swing Chart Technical Forecast

The early price action suggests the direction of the USD/JPY will be determined by trader reaction to the pivot at 103.496.

Bullish Scenario

A sustained move over 103.496 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into 104.135, followed by 104.398 and 104.499. This is not likely, however, without help from rising Treasury yields.

Bearish Scenario

A sustained move under 103.496 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into 102.593. This move would likely be fueled by a spike to the downside in Treasury yields.

Side Notes

Trader reaction to 103.496 is very important because buyers are trying to form a potentially bullish secondary bottom. The first rally from 102.593 was likely short-covering. The formation of a secondary higher bottom, however, usually indicates that real buyers are returning.