USDJPY is encountering strong resistance at the 120.00 major psychological mark and may be due for a pullback soon. Price could test the rising trend line on its 1-hour chart, as this has been holding as support for the past month.
The trend line is also close to the 100 simple moving average, which is moving above the longer-term 200 SMA and confirming the current uptrend. This has also held as a dynamic support zone in the previous pullbacks.
Potential support is located around the 118.50-119.00 levels, which span the trend line and simple moving averages. A break below this area could be a sign that a deeper retracement is taking place, with USDJPY moving on to test the area of interest around 117.50.
Stochastic is moving out of the oversold area already, which suggests that buying pressure is already picking up. With that, the retracement might be shallow and price could be gearing up for an upside break of its previous highs.
A break past the 120.00 mark could push USDJPY to 121.00 and perhaps all the way up to 125.00 eventually. This could hinge on the outcome of the event risks for USDJPY today, which include the US non-farm payrolls release. A faster pace of hiring growth is expected, as the economy probably added 231K jobs in November compared to the previous 214K gain.
A weaker than expected result, on the other hand, could undermine the Fed’s expected rate hike time line sometime next year. This might lead to prolonged profit-taking on USDJPY trades, which would mean a sharper correction for the pair.
Fundamentally speaking, the path of least resistance is still to the upside, as the BOJ is dealing with the prospect of deflation and an ongoing recession in Japan. Although Prime Minister Abe has announced a delay in the next sales tax hike, further monetary stimulus might be needed to shore up the Japanese economy.
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