USD/JPY Fundamental Daily Forecast – Short-covering Rally Rapidly Approaching Key 109.919 Level

The Dollar/Yen is trading higher on Monday shortly before the U.S. opening, rebounding from last week’s nearly 4-month low, as tensions between the United States and North Korea dissipate amid talk of diplomatic negotiations.

At 0852 GMT, the USD/JPY is trading 109.742, up 0.578 or +0.52%.

After testing 108.716 late last week, the Forex pair is now trading in a position to challenge the major technical retracement level at 109.919. Overtaking this level will indicate the buying is getting stronger. Until then, we’re looking at a short-covering rally being fueled by profit-taking and renewed demand for higher-yielding assets.

Rising U.S. Treasury yields and higher equity markets are also helping to make the U.S. Dollar a more attractive investment.

In other news, early Monday the Japanese government said Quarterly Preliminary GDP rose 1.0%. This was higher than the previously reported 0.3%. The Annual Preliminary GDP Price Index was down 0.4% versus the previously reported -0.8%.

Forecast

There are no major U.S. economic reports today so the primary focus will be on the Russia-China plan to diffuse the North Korean crisis. The plan would have North Korea freeze missile tests and for the U.S. and South Korea to stop large scale military exercises.

The USD/JPY is likely to remain underpinned as long as this plan remains a viable solution to the crisis. However, gains are likely to remain limited because investors are beginning to believe the Fed will pass on anymore interest rate hikes this year. The fate of further rate hikes was likely sealed by last Friday’s disappointing U.S. consumer inflation data and last Thursday’s weaker-than-expected U.S. producer inflation data.

The key area to watch today is 109.919. The USD/JPY recently spent a lot of time trying to establish support at this price before succumbing to selling pressure last week. Therefore, short-sellers are likely to defend this area. If successful, the Forex pair is likely to fall into a trading range bounded by 107.856 and 109.919.

Overtaking 109.919 will indicate the short-covering is getting stronger. However, unless buyers can take out the pre-Korean crisis top at 111.045, the rally is likely to stall.

Counter-trend buyers are likely to approach the long-side with caution because there is still tension in the air. Traders should also continue to prepare for volatility.