USD/JPY rallied nearly 1% today and easily sliced through the major psychological (and Fibonacci) resistance at the 100.00 figure. The last time USD/JPY broke 100 it rallied nearly 400 pips, to 103.72 before turning lower. The question is, could the same thing be about to play out again?
There are several key differences between the previous break of 100, back in May, and this one.
First, the May breakout was preceded by a full month of consolidation below that 100.00 figure which encouraged lots and lots of stops to collect just above 100.00, so when price broke the figure, a major stop hunt occurred, helping push the pair up to a high of 100.77 on the day of the breakout. This time around, price didn’t really hesitate at 100 for very long at all, no major consolidation occurred. Oddly enough, however, that didn’t seem to the bother the market as today’s candle is nearly identical to that of May 8th; touching a high of 100.72. Whether or not the lack of a consolidation will impact the sustainability of this move higher remains to be seen, but certainly it didn’t hurt the strength of the initial breakout.
The other major differences between the May break and this one are fundamental in nature. Back in May, markets had even less guidance on the idea of Fed “tapering”, and many people thought that we could see the first reduction in asset purchases occur in June, as had been suggested by a few FOMC members. Second, the May breakout was preceded by a better than expected NFP report the week prior, and an unexpected tick down in the unemployment rate, both of which usually contribute to USD strength, especially against the Yen. This time around, NFPs are still to come – this week in fact. This cuts in both directions of course.
A stronger than expected print should help encourage USD/JPY higher, while a weaker print could send the pair back below 100 in no time at all. How that will affect the way the pair trades until Friday is uncertain, but we may see some position squaring before the release, especially considering the US holiday on Thursday. With so many traders away from their desks the second half of this week, we may see the pair continue to slowly grind higher as the volume necessary to prompt a reversal remains lacking.
Considering the similarities of the daily candles, it is very possible we may see a repeat of the May breakout, meaning higher prices for USD/JPY over the next two weeks. The next significant resistance figure is around 101.60 (the 78.6% Fibonacci retracement), before the previous highs at 103.79. The 100.00 figure stands as key support.
Written by: Liam McMahon, Currency Strategist – GlobalFxClub.com