Technical setup suggests further downside for USDJPY
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The US dollar-Japanese yen currency pair had drawn much attention across 2021 and 2022 for its meteoric rise that sent USDJPY from a low of 102.6 on Jan 6, 2021, to a high of 151.9 on Oct 21, 2022.
Since then, the pair has reversed to the downside and touched 127.22 in mid-January 2023, before rebounding to test the resistance zone around 137.9 on Mar 8, 2023. USDJPY has since resumed its downtrend and currently hovers around 130.5. We hold the view that the pair is likely to extend further downside based on several technical indications.
Firstly, the breakdown of USDJPY below a rising wedge formation on 10 March hints that the pair has more room to depreciate. Rising wedge is a common bearish reversal chart pattern that is formed by two upward slopping trend lines that converge towards the top.
This chart pattern that occurred between mid-January and March signals that upward momentum is waning and that prices could reverse to the downside upon completion. Despite the fact that the pair has already made some progress towards its breakdown target at S3, we expect a temporary rebound to test R1 before it continues on its broader downtrend.
Moreover, a bearish crossover of the 20 exponential moving average (20 EMA) below the 50 exponential moving average (50 EMA) also adds validation that the bears are in control and we can expect further downside in the following weeks.
Looking at the technical indicators, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) echo the same bearish sentiment. RSI is a momentum oscillator that suggests overbought conditions when the reading is above 70, while a reading below 30 shows oversold condition.
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In a downtrend, the RSI tends to stay below the neutrality zone at 50. In tandem with the rising wedge breakdown on 10 March, the RSI also slipped into the bearish territory below 50 and now hovers around 36.
On the other hand, the MACD indicator has also gone into the negative territory, adding confluence to the overall bearish outlook for the pair.
At the time of writing at 12pm on Friday (Mar 24), the USDJPY is testing support around 130.3. We expect a temporary rebound to test resistance around 131.8 (R1).
Should the buying momentum send rates above R1, the 20 EMA resistance should cap the pair from further gain. In the scenario where USDJPY conforms and retraces from R1, we set our targets at 128.95 (S2) and 127.2 (S3) in extension.
The writer is a strategist at Phillip Nova
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