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USD/JPY Hits 120, What Next?
For the first time in 7 years, USD/JPY hit 120. This morning’s strong U.S. jobless claims report reinforced the recovery in the U.S. economy while ECB President Draghi’s dovish monetary policy bias increased the attractiveness of U.S. assets and in turn the U.S. dollar. The ECB did not announce new measures, but they fully intend to do so in the early part of next year. Unfortunately USD/JPY failed to hold its 120 break and a large reason for that are U.S. rates, which refuse to rise, encouraging profit taking at this key level. At this stage, it will all be up to Friday’s non-farm payrolls report. If payrolls exceed 230k and the jobless rate holds steady or improves, USD/JPY will rise back above 120. However if payrolls prints 215k or less and the unemployment rate holds steady or rises, it will back to 119 for the pair.
Taking a look at the monthly chart of USD/JPY, 120 is an important resistance level not only because of its psychological significance but also because it represents the 61.8% Fibonacci retracement of the 1999 to 2011 decline. If this level is broken, the next area to watch will be 122.20, where the currency pair found resistance in January and February of 2007. Should this turn out to be a failed test for USD/JPY in the near term, the pullback could extend as far as its recent swing low of 117.25