The USD/JPY bullish breakout that occurred at the end of the month of July appears to tentatively respecting the 110 handle. Price action on the weekly chart is displaying a potential bearish butterfly pattern that also coincides with the key price barrier. Point D is targeted by both the X to A leg’s 161.8% Fibonacci expansion level and the B to C move’s 200.0% Fibonacci expansion level.
The bullish rally for the dollar has been supported by the improving economic data out of the U.S. and increased expectations that the Fed may begin tightening early next year. Last week’s high of 109.47, was the strongest level we have seen since August 2008. While the BOJ has been supporting the recent weakening yen, investors are still buying up Japanese stocks and companies are now opposing the falling yen since it is contributing to rising energy costs. This could be a perfect spot for minor pullback.
The longer-term bullish rally may eventually continue and one key catalyst could be when the BOJ announces another round of easing. This may happen since last Friday the BOJ downgraded their outlook on the Japanese economy.
Last month, I mentioned my end of year forecast was around the 110 region. While the bullish move may eventually target 112.50, further upside may be limited until either the Fed tightens or the BOJ acts again.
The trade: Sell USD/JPY at 109.00 with a stop loss at 109.32 and a take profit at 108.36. The Risk/Reward Ratio is 1:2
Edward J. Moya
WorldWideMarkets Online Trading