USD/JPY Forex Technical Analysis – Testing Retracement Zone; Strengthens Over 113.173, Weakens Under 112.538

The Dollar/Yen closed lower on Tuesday in a volatile session that saw the Forex pair hit its lowest level since October 11 before bouncing back into the close.

The safe-haven Japanese Yen jumped early in the session as global markets fell sharply after the head of drugmaker Moderna said existing COVID-19 vaccines would be less effective against the new variant, although BioNTech’s chief executive struck a cautiously positive note, saying the vaccine it makes with Pfizer would likely offer strong protection against severe disease from omicron.

On Tuesday, the USD/JPY settled at 113.135, down 0.400 or -0.35%.

The USD/JPY rebounded later in the day after Federal Reserve Chair Jerome Powell signaled a faster taper of stimulus despite the risks around the omicron COVID-19 variant.

Powell said in testimony to Congress on Tuesday that Fed officials will discuss at their Dec. 14-15 policy meeting whether to end bond purchases a few months earlier than had been anticipated.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 112.538 early Wednesday will signal a resumption of the downtrend. A move through 115.519 will change the main trend to up.

The main range is 110.826 to 115.519. This zone was tested successfully on Tuesday. It is also controlling the near-term direction of the USD/JPY.

The new minor range is 115.519 to 112.538. Its retracement zone at 114.029 to 114.380 is the primary upside target.

Short-Term Outlook

The early direction of the USD/JPY on Wednesday will be determined by trader reaction to 113.173.

Bullish Scenario

A sustained move over 113.173 will indicate the presence of buyers. If this move creates enough upside momentum then look for a surge into 114.029 to 114.380.

Trader reaction to 114.029 to 114.380 will determine the short-term direction of the USD/JPY. Since the main trend is down, sellers are likely to come in on a test of this area. They are going to try to form a potentially bearish secondary lower top. Taking out 114.380 will indicate the counter-trend buying is getting stronger.

Bearish Scenario

A sustained move under 113.173 will signal the presence of sellers. This could trigger a hard break into 122.619, followed closely by 112.538. Taking out this level could trigger an acceleration to the downside. The daily chart indicates there is plenty of room to break with 110.826 the next major target.