USD/JYP: Stage set for breakout

After a three-month rally for the U.S. dollar, the month of July started on the back foot last week as the likes of the euro, pound and Aussie all found some much-needed support. But the yen was lagging behind last week, undermined in part by the fact the Bank of Japan remains one of the most dovish central banks out there.

The yen’s weakness has actually been more prevalent at the start of this week. This is partly a reflection of investors’ insatiable appetite for risk as global stock markets resumed their bullish trends despite raised fears over a U.S.-led trade war.

Indeed, the yen’s relative weakness is clear to see as the stock market rally reduces the appeal of the safe haven currency -- even the British pound/Japanese yen (GBP/JPY) currency pair managed to hit its highest level since mid-June today despite the pound's sizable drop the day before. The euro/yen (EUR/JPY) meanwhile has also taken out its bearish trend line, paving the way for a potential rally towards 132.00 area. So, could the USD/JPY finally break higher and head to 112+ this week?

Despite its hesitant start to the new month, the U.S. dollar remains among the strongest of currencies out there owing to a hawkish central bank. The Federal Reserve is on course to raise interest rates two more times before the year is out and the probability of it doing so could increase should Thursday’s U.S. CPI inflation figures top expectations. If the dollar remains supported after the data is published then a breakout for the USD/JPY would become even more likely.

But the breakout above the USD/JPY’s long-term bearish trend line may occur even before the data is released, but after several failed attempts will it be successful this time around? From a purely technical point of view, the fact that the weekly chart shows price has been coiling in a tight range before this week’s attempt to break higher suggests it may actually be successful this time around. What’s more, the USD/JPY has found a base above its main moving averages. Indeed, the 50-day average has just crossed above the 200-day in a bullish development known as a “golden crossover.” It is thought that when the averages are in this order, some types of trend-following large institutional investors and speculators only look for bullish setup. So with their support, the USD/JPY may finally stage a breakout, especially since market sentiment remains overall positive.

While most technical indicators indeed point to a breakout, we must also prepare ourselves for the possibility of a fakeout. With this in mind, we would expect the bulls to hold their ground above the broken resistance levels such as 111.00 now; failure to do so may be the result in some long-side liquidation, leading to a potential sell-off. But the line in the sand for us is now at 110.35 – the base of the latest breakout. A potential move back below this level would probably be game over for the bulls.