Bearish trend indicators are weakening for USD/JPY as price continues to struggle to rally above the 200-day SMA. Price action could remain range bound leading up to the highly anticipated Federal Reserve rate decision on Thursday. As the market investors anticipate Chinese government support to increase and for the ECB to remain accommodative until 2016, many economists are split as to whether the Fed will finally raise rates. With the other advance major economies remaining supportive for their respective economies, it is making the Fed’s decision harder to begin tightening and that could support a weaker dollar leading up to the Fed’s decision.
Whether or not they hike, the bigger reaction may come from the Fed’s guidance on future rate decisions. The initial reaction on no rate hike should be dollar negative, but we could see eventually see strong buying if the Fed is confident rates will still rise this year.
If we see no rate hike and losing optimism on a hike this year, the dollar could be in for major drop.
The USD/JPY daily chart shows that price formed a bearish butterfly pattern on June 5th and that ended with the formation of a bullish butterfly pattern on August 24th. The next couple of days could see range trading respect key resistance from 121.75 and support from the 118.00 handle.
If bullish momentum returns after Thursday, we could see a rally towards 122.50. Major resistance will come from the 124.50 zone. If the dollar is heavily sold and 118 breaks, deeper support could come from 114.50.
The trade: Buy USD/JPY 118.50, with a stop loss at 117.50 and take profit at 121.50. The risk/reward ratio is 1:3
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading
