USD/JPY Produces Breakdown from Bear Flag Formation
Tokyo (May 30) USD/JPY edged lower in Monday’s trading and the selling has picked up some steam in today’s session, with the pair currently holding near 110.96, a loss of 0.27% from Monday’s North American close. The low for the session currently stands at 110.78.
The pair is being boosted today, in part, by strength in the yen stemming from concern over Italian elections, which now may take place as early as September, according to a report from Reuters. While the Euro had initially come under pressure as a result of the political circumstances, EUR/USD is now in the process of recovering. The yen, however, remains firm as the dollar has slipped ahead of the release of Personal Income and Spending along with PCE Prices at 08:30 ET. The US dollar index (DXY) is currently trading at 97.52, a decline of 0.07% over Monday’s close.
USD/JPY also weakened following the release of Japanese employment data, Household Spending and Retail Sales. The unemployment rate for April came in unchanged at 2.8%, as expected. Household Spending declined at a seasonally adjusted 1.4% in April compared to a year ago, following a 1.3% decline the previous month. The decline was larger than the expected decline of 0.7%. However, Retail Sales beat expectations, rising at an annualized 3.2% in April, following a 2.1% increase in March. Consensus estimate was for a reading at 2.2%.
USD/JPY weakness accelerated following the release of Retail Sales and, as a result of today’s decline, the pair has broken solidly below the lower boundary of the bear flag formation which formed following the establishment of the latest reaction low on May 18th at 110.24.
A bear flag formation takes place after a protracted move to the downside and represents a narrow countertrend move. A downside break from the pattern calls for a decline of similar extent to that which preceded the flag, which calls for an eventual move to the 107.00 level in USD/JPY.
Ahead of this target, however, are several layers of support, the first being May 23rd’s 110.86 low, which is currently being tested. On a sustained drop below this level, more significant support stands at the May 18th low at 110.24, which comes in near the same level as a 61.8% Fibonacci retracement of the advance from the April reaction low to the May high.
A break below this corrective bottom would resume the broader bearish trend in USD/JPY, a development that would likely bring in more sellers, resulting in an eventual drop to the next level of support at the April low near 108.00.
On the upside, first resistance is at the lower boundary of the flag formation, currently near 111.55. A sustained move above this level is required to void the flag formation and its downside target. However, with the Stochastic, a price momentum indicator, rolling over and producing a downside cross prior to reaching an overbought level, the current bias is to the downside, with a break of initial support at 110.86 expected in today’s trading.
Source: EconomicCalendar
