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Pullback Risk in USD/JPY
For the past month USD/JPY has been in a relentless uptrend and overnight during the European session, the currency pair hit a high of 118.98, its strongest level since October 2007. Throughout this time we have seen not much in the way of corrections but with today’s sharp intraday reversal, we could see a deeper pullback in USD/JPY. Investors shrugged off a better than expected Philly Fed report and with no U.S. data scheduled for release on Friday USD/JPY could dip back to 116. A move to this level would shake out some longs while keeping the overall uptrend intact. Better than expected data also failed to lift Ten-year Treasury yields which fell 2bp. With only secondary reports scheduled for release next week, more investors could feel compelled to take profits before the currency pair hits 120.
Taking a look at the monthly chart of USD/JPY, 120 is not only a psychologically significant level but also the 61.8% Fibonacci retracement of the 1997 to 2011 decline. As a result, it should prove to be a formidable resistance level for the currency pair. While some bulls may wait to take profits closer to that level, pair’s 8% rally in November could encourage others to bank gains earlier. Yet declines in USD/JPY should be limited to 116 and at worse 115 because monetary policy dynamics should keep the currency pair bid.