USD/JPY – Upside Potential on Falling Yields?

Essential Insights

• USD/JPY has rejected sharply from its long-term bearish channel.
• US Treasury Yields at historical lows.
• Dollar Index risen to test important 100.00 level.

Technical Analysis

Prices have rejected from the lower trendline support of the bearish channel outlined in the image above. Price have also tested and rejected from the 800-day EMA 106.00; this remains as a strong level of support for this pair.

On the Daily timeframe there is a falling wedge formation which has been successfully broken above with multiple bullish candlestick closures. On the 4-hour time frame, 106.930 has been highlighted as an important short-term zone, price has the potential to revisit this zone before moving higher.

The 8-day EMA (Blue) 20-day EMA (Pink) are moving higher on the daily timeframe, indicating bullish momentum. A cross of these EMA’s could see significant bullish momentum in the short term, with the upper trendline resistance of the bearish channel as prime targets.

Fundamental Analysis

A second wave of COVID-19 infections in South Korea and Germany has spooked markets, sending global equities lower and seeing safe haven assets such as the dollar and US treasuries, catching a bid.

The accelerated cases are originating from countries that have emerged from the economic lockdown, suggesting it is still too early to be removing lockdown measures.

Bond Yields have fallen as a result. Bond yields move inversely to bond prices. USD/JPY tends to appreciate when bond yields fall due to attractive trade carry potential, explaining the bullish price action seen.