USDJPY looks ready to resume its rally, as price recently retreated to the broken resistance level near 119.50 and bounced off. This lines up with the Fibonacci retracement levels on the latest swing low and high on the 1-hour time frame.
A bounce from this area could mean a move back up to the previous highs near the 120.50 minor psychological resistance. Further gains past this point could lead to a test of the previous year highs near the 122.00 level.
The path of least resistance is to the upside, as the US economy could surprise with another strong NFP reading later on this week. If so, USDJPY could resume its uptrend, as more traders predict that the Fed is moving close to hiking interest rates later this year. Even though Fed head Janet Yellen tried to downplay these market expectations, a few FOMC members confirmed that the Fed is taking a more hawkish stance these days.
In contrast, the Japanese economy isn’t faring so well since inflation and spending reports from Japan have continued to weaken. This could prompt the BOJ to increase its stimulus efforts in order to ward off deflation and push for stronger consumer spending.
However, if this pair fails to draw more upside momentum, price could head back to the nearby support at the 118.50 minor psychological level. Further losses could lead to a test of longer-term support around the 116.00 handle.
Stochastic is on middle ground for now but seems to be moving lower, which suggests that a deeper correction might take place before USDJPY resumes its climb. Event risks for this USDJPY setup today include the US non-manufacturing PMI release and the ADP non-farm employment change reading, with strong figures likely to set the tone for an upside NFP surprise on Friday.
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