The unemployment rate in the U.S. continues to fall and the strongest job growth in the U.S. since the 1990’s continues to drive optimism with the U.S. economy. Stagnant wages however remains the weak link for this recovery. The pace of hiring is picking up and trend for U.S. dollar strength is likely to remain in place.
While the path appears to be firmly set for further U.S. dollar momentum, price has shown signs that the current move against the Japanese yen has overextended itself. The daily chart above displays a potential bearish ABCD pattern that could signal a reversal towards the 113.13 level. Currently point D is identified with the 200.0% Fibonacci expansion level of the B to C move. A few months ago, I highlighted my end of year target to at the very least target 112.50, with 114.50 being the furthest upside target.
The seven-year high that was made last week is poised for a pullback and traders should not be surprised if we see an extended period of consolidation. With many expecting no rate hikes in the U.S. to occur until next October, we could see a little profit taking on the long dollar positions. If USD/JPY weakness persists, major support will come 111.61, which is the 38.2% Fibonacci retracement level of the B to C leg. Critical resistance will come from the 114.90 region.
The trade: Sell USD/JPY at 114. 20 with a stop loss at 114.70 and a take profit at 113.20. The Risk/Reward Ratio is 1:2
Edward J. Moya
WorldWideMarkets Online Trading