USD/JPY Above 120 – More Gains Ahead?

USD/JPY Above 120 – More Gains Ahead?

USD/JPY Above 120 – More Gains Ahead?

With most of continental Europe closed for trading, USD/JPY broke through 120 to hit its strongest level in more than 2 weeks. What’s interesting about the move is that it occurred on a day with softer U.S. data. We had an unexpected decline in construction spending, softer than anticipated manufacturing ISM and University of Michigan consumer sentiment reports. However on Thursday jobless claims dropped to its lowest level in 15 years which bodes very well for next week’s labor market report. We will be focused on non-dollar drivers in the front of the week with the RBA rate decision, U.K. election, New Zealand and Australian employment reports scheduled for release. The uncertainty and risk posed by these reports could make the U.S. dollar more attractive. Towards the end of the week, the focus will turn to non-farm payrolls. Given last month’s surprisingly anemic job growth and the big improvement in jobless claims, everyone expects a significant rebound in payroll growth. The unemployment rate is also expected to drop to 5.4%, which would represent a big improvement that should breathe new life into the U.S. dollar. At the same time, Japan’s Global Pension Investment Fund, who widened their investment mandate will lend support to USD/JPY as they expand their purchases of foreign assets.

Technically, although 120 is an important psychological level for USD/JPY, there are many layers of resistance in the currency pair above current levels. First we have the 61.8% Fibonacci retracement of the 1998 to 2011 decline at 120.16, followed by the Feb high of 120.50 and the April high of 120.85. If the currency pair breaks above all of these levels, it would then face stiff resistance at the March high of 122. On the downside losses should be limited to the March low at 118.33.

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