USD/JPY Forex Technical Analysis – Needs to Clear 106.077 to Sustain Counter-Trend Rally

The Dollar/Yen is edging lower on Thursday after posting a dramatic reversal to the upside the previous session. The Forex pair showed a slight follow-through to the upside earlier in the session, but there weren’t enough buyers around to sustain the counter-trend rally. This suggests that Wednesday’s potentially bullish chart pattern may have been fueled by short-covering rather than aggressive buying, further supporting the notion that the rally may have been a “one and done” event.

At 08:55 GMT, the USD/JPY is trading 105.975, down 0.145 or -0.14%.

The catalyst for Thursday’s rapid rebound by the USD/JPY was the minutes from the July Federal Reserve monetary policy minutes. In the minutes, the Federal Reserve suggested it could pursue aggressive stimulus measures for longer than under its previous strategy.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart, but momentum may be shifting to the upside with the formation of the closing price reversal bottom and subsequent confirmation earlier today. The problem with the reversal and why it could weaken is time. Usually, the best reversal bottoms form following a 7 to 10 day correction. This one formed only 4 days down from the last top.

A trade through 105.104 will signal a resumption of the downtrend. A move through 107.049, however, will change the main trend to up.

The minor range is 107.049 to 105.104. Its 50% level at 106.077 is acting like resistance.

The short-term range is 104.189 to 107.049. Its 50% level at 105.624 is potential support.

The main resistance is the long-term 50% level at 106.706.

Daily Swing Chart Technical Forecast

With investors treating yesterday’s rally like an outlier event, the move has stalled at the minor pivot at 106.077. Trader reaction to this level is likely to set the tone for the session.

Bearish Scenario

A sustained move under 106.077 will indicate the presence of sellers. The trend is down so sellers are likely showing up to defend the 50% level. If the downside momentum continues then look for a possible break into the next 50% target at 105.624. The USD/JPY could start to accelerate to the downside if this level fails with 105.104 the next target.

Bullish Scenario

Overcoming 106.077 and sustaining the rally will indicate that the counter-trend buying is getting stronger. This could trigger an acceleration to the upside with the next target the major 50% level at 106.706.

Side Notes

Continue to monitor the Treasury yields for direction. They will tell us if the reaction to the Fed minutes is signaling a rebound in the U.S. Dollar or if bearish traders just took a one day breather on Wednesday.