On the daily chart below, we can see that the USDJPY has recently bounced from the 130.00 handle and it’s now eyeing the red long period moving average.
The big fall was caused by the Silicon Valley Bank collapse that triggered a huge fall in Treasury yields as the market started to reprice lower future interest rates expectations. The USDJPY paid is very correlated with the direction of US Treasury yields, so it followed the same trajectory.
The market thinking is that the recent crisis in the banking sector would slow the economy more and lead to an earlier than expected recession causing the Fed to cut interest rates very soon.
The economic data after the events though have not showed any weakness yet, on the contrary, they’ve been stronger than expected. For this reason, the market bounced, and it should keep on pulling back as long as the data keeps showing strength.
On the 4 hour chart below, we can see that the falling channel got broken today and this should give the buyers even more conviction for a bigger rally. We can also see that the price action within the channel has been diverging with the MACD signalling a loss of momentum.
In such scenarios, the price pulls back to the nearest swing level/trendline, and when it breaks out, the correction goes all the way back to the start of the diverging price action, which in this case comes at the 135 handle and the 61.8% Fibonacci retracement level.
On the 1 hour chart below, we can see that we may have a big inverted head and shoulders pattern with the neckline being the already broken top of the channel. If we were to get a pullback, we should see the buyers piling in at the 131.29 support where we will also find the red long period moving average and the broken top of the channel.
The sellers, on the other hand, will need the price to fall back within the channel to invalidate the bullish setup. Important economic data for this week are the US Jobless Claims tomorrow. It’s likely that we will see a rally in the pair in case the data beats and a selloff in case the data misses.
