USD/JPY Forex Technical Analysis – Trader Reaction to 134.901 – 135.960 Determines Near-Term Direction

The Dollar/Yen soared on Friday in wake of much stronger-than-predicted U.S. jobs market data for July that eased concerns about the U.S. economy being in recession, while simultaneously intensifying worries that inflation may persist at elevated levels.

According to a U.S. government report, the economy added 528,000 jobs in July, far more than the 250,000 forecast by economists, while the pace of Average Hourly Earnings growth accelerated to 0.5 month-over-month and 5.2% year-over-year from 0.4% and 5.1% in June.

On Friday, the USD/JPY settled at 135.043, up 1.808 or +1.36%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) finished at $69.27, down $1.14 or -1.62%.

The solid jobs report strongly supports the case for further aggressive rate hikes from the U.S. Federal Reserve, with financial market traders already pricing in a more than 60% chance of a 75 bps rate hike at the central bank’s next meeting in September from around 40% shortly before the release of the report.

More importantly for Dollar/Yen traders, the data sent U.S. government bond yields sharply higher across the yield curve, making the U.S. Dollar a more attractive asset than the Japanese Yen.

Another way to look at it, the U.S. Federal Reserve is hawkish and likely to raise rates aggressively, while the Bank of Japan remain dovish and likely to keep 10-year Japanese government bond yields looked close to zero.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. However, momentum has been trending higher since the confirmation of the closing price reversal bottom on August 2.

A trade through 139.389 will change the main trend to up. A move through 130.412 will negate the closing price reversal bottom and signal a resumption of the downtrend.

The main range is 126.362 to 139.389. Its retracement zone at 132.876 to 131.338 is support.

The short-term range is 139.389 to 130.412. Its retracement zone at 134.901 to 135.960 is potential resistance. It was tested on Friday.

Short-Term Outlook

Trader reaction to the retracement zone at 134.901 to 135.960 is likely to determine the short-term direction of the USD/JPY.

A sustained move over 134.901 will be a sign of strength early Monday with 135.960 the first target. Overtaking this level could trigger an acceleration to the upside.

A sustained move under 134.901 will signal the presence of sellers. They will be trying to form a potentially bearish secondary lower top. If this move gains traction then look for a move into the minor pivot at 132.953. If this level fails then look for the selling to possibly extend into the main retracement zone at 132.876 to 131.338.