As we head into the weekend, bulls and bears find themselves in a tussle over which side of the 2017 descending resistance line USDJ/PY will close on. This week’s price action marks the 2nd attempt to break it following a failed attempt to take the 115 handle back in July.
Hawkish comments from Yellen and Trump talking tax reform helped it initially break higher yesterday, yet momentum wavered and a close above the trendline failed to matrialize. A potential catalyst to help traders decide this week’s close may come in the form of Core PCE, the Fed’s preferred inflationary measure.
Currently at 1.4%, it’s lowest since December 2015, it may only take a percentage point higher in a non-geoplitically threatening environment for Dollar bulls to return to the table. Unfortunately, we cannot be certain either condition will occur if recent data and news flow is anything to go by.
Bullish momentum of the past three weeks has been impressive since failing to break the 61.8% retracement level at 107.85. If we are to see USD/JPY rally today and close convincingly above the descending trendline, the 114.95 swing high will be firmly in focus.
But at current levels, the weekly chart is on track to close with an elongated Doji beneath a key technical level. This could be seen a potential sign of weakness from technical traders and any bearish follow-through would also put the possibility of a descending triangle formation on the radar.
The strength of the dominant trend on the daily chart had showed no signs of exhaustion until recently. Only minor pullbacks had materialized and the two breaks higher initially looked promising. Yet as we’ve now witnessed two consecutive days which failed to hold above the trendline, the potential for price exhaustion at a key technical is present. If prices are to fall and break yesterday’s low, it would appear a bull-trap has been seen.
That both days have closed on the trendline underscore the importance of this level for traders, so a close either side of it may help set sentient for next week.
A break and close higher would be welcomed by trend traders and we ourselves would be on the look-out suitable entry points for long positions. A combination of bullish momentum and evidence of price compression would enable us to hop on board the trend during periods of lower volatility. So how price reacts around current levels remains key as we head into next week, as it decides if USD/JPY will become a prime watch-list candidate or one for the back-burner.