USDJPY seems to be taking a break from its current selloff as it bounced off the 116.00 levels and retreated close to the 118.00 handle. Using the Fib tool on the 1-hour swing high and low indicates that the 61.8% Fibonacci retracement level is already holding as resistance.
Stochastic has just reached the overbought area and turned down, indicating a potential return in bearish pressure. If so, USDJPY could fall from its current 117.50 area and test the previous lows or even create new ones.
USDJPY Forex Setup
Yesterday, the US retail sales report turned out to be a huge disappointment after the headline figure marked a 0.9% drop while the core figure showed a 1.0% decline. This reminded traders that the US central bank might not be ready to tighten monetary policy soon and that the period of low rates might be extended.
With that, the US dollar could resume its slide against most of its forex counterparts, including the Japanese yen. USDJPY has been on a downtrend so far this year, with shallow retracements on its short-term time frames. A break past the 118.00 mark, however, might be indicative of a reversal.
For today, the event risks for this USDJPY trade include the US PPI releases and the Philly Fed index. Weaker than expected producer inflation figures are eyed, as commodity prices have been falling recently. If so, this could lead to weaker tightening forecasts for the Fed this year, which might be negative for the US dollar.
On the other hand, strong data could lead to a dollar bounce, as it would suggest that the US economy is being immune to global commodity price declines. A move past the 118.00 level for USDJPY could lead to further gains until the 119.00 mark or even until the previous highs at 121.00.
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