JPY: The sharp correction lower in USD/JPY extends further after key technical barriers had been breached, most notably the 50DMA which has defined the uptrend for the majority of the year. Consequently, stops are likely to have been taken out as stale longs head for cover, and thus the pair is on course to post its largest weekly drop since the Q1 2020 Covid Crash. Elsewhere, the move lower in bond yields has also played its part in benefitting the low-yielding funding currency with the US 10Y yield breaching key support at 2.70%. In turn, Fed Chair Powell’s presser in which he stated that there is a possibility that interest rate hikes may rise at a slower now they are at neutral, suggests that we are perhaps passed peak hawkishness. As the Japanese Yen becomes more attractive as global rate differentials narrow.

USD/JPY On Course For Largest Drop Since March 2020

Source: Refinitiv

That being said, key support now sits at 131.50 a level I had been looking for in my Q3 top trade. On the topside, the 50DMA will be closely watched in the event of a retracement in USD/JPY. Those bearish USD/JPY would prefer to see the 50DMA hold. As mentioned above, with the break below 2.70% in the US 10Y yield, this appears to be a head and shoulders, projecting 1.90%, which is not unreasonable now that bond yields have continued to drop, even when the Federal Reserve has hiked 75bps back to back.

Head & Shoulders for US 10Y Yield

Source: Refinitiv

USD/JPY Chart: Daily Time Frame

Source: Refinitiv

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