USD/JPY To Follow Yields Lower?

The most volatile session since the flash-crash saw USD/JPY break convincingly lower from its triangle formation. Moreover, it closed beneath the prior swing low and cluster of moving averages (50, 100 and 200-day eMA’s) to underscore the power of the breakout. The dovish tone of the meeting caught markets by surprise, which now sees the dollar and bond yields under pressure.

As it happens, we’ve been waiting for the positive correlation between USD/JPY and the US2Y to return and we strongly suspect the Fed meeting could be the required catalyst. With both markets under pressure, we could see the gap narrow and for both to trade lower over the coming weeks.

Over the near-term we see potential for an obligatory bounce above support, although prices are challenging a bullish trendline as I type. If support holds, we’re on the lookout for a potential ‘right shoulder’ to form as part of a head and shoulders top pattern, which would project an approximate target around 108.75 if successful. Alternatively, wait for a break below 110.22 for extra confirmation of a trend reversal.

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