USDJPY has been making higher lows and lower highs, creating a symmetrical triangle on its 1-hour time frame. Price just bounced off the triangle resistance and is currently testing support, still awaiting a bounce or a breakdown.
Both stochastic and RSI have already reached the oversold regions and are turning higher, indicating a likely pickup in bullish momentum and a bounce for USDJPY. If so, a move back to the triangle resistance near the 121.00 major psychological level might take place.
Take note, however, that the 100 SMA is starting to cross below the longer-term 200 SMA, which means that the path of least resistance is to the downside. In that case, a downside break could lead to around 300 pips in losses, which is approximately the same height as the triangle formation.
USDJPY Fundamental Factors
The FOMC decided to keep interest rates on hold at 0.00-0.25% in their September rate decision, much to the disappointment of dollar bulls who were counting on a liftoff this month. Most Fed officials still favored a rate hike sometime this year, with one policymaker actually voting to tighten this week. Another Fed official called for negative interest rates due to the weak inflationary environment.
The Fed upgraded their growth forecast for this year, even with the economic and financial uncertainty associated with the downturn in China. However, policymakers downgraded their forecasts for growth, inflation, and employment for 2016 and 2017.
Earlier this week, the BOJ statement also sounded cautious, as the Japanese central bank highlighted potential risks stemming from China and emerging economies. One policymaker voted to taper asset purchases but was outvoted by other members who wanted to keep policy unchanged.
Since Japan is at greater risk compared to the US when it comes to repercussions from China, the path of least resistance for USDJPY is to the upside. For now though, the disappointment from the FOMC might continue to keep gains in check and keep the pair weak, possibly offering a larger correction from the recent uptrend. There are no reports due from Japan and the US today.
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