USD/JPY is modestly higher relative to Monday’s N.Y. close, up 0.07% and testing the 104.00 handle. The pair’s technical condition was unchanged as a result of Monday’s price action, as key resistance at the early September reaction high at 104.32 remains in play. The high of the current rally attempt stands at 104.64, established in last week’s trading, during which the dollar gained more than 1% versus the yen.
USD/JPY needs to embark on a sustained move above this resistance area in order to suggest a bottoming formation has been established. On such a move, the target become the July reaction high at 107.50. Minor resistance levels stand in the way of this target, the next being the late July high at 105.62.
The current consolidation is helping ease the extreme overbought condition, which developed as a result of the persistent advance from the late September lows. Downside reactions in response to this overbought condition have been brief and followed by quick recovery rallies, underscoring internal strength and keeping the bias to the upside. Thus, a breakout above the 104.32 level is currently expected, suggesting any near term pullbacks are best used as buying opportunities. The pair is not overbought on a weekly basis. Therefore, such a breakout could take place over the short term. The ability of the pair to move higher in the presence of an overbought condition on a daily basis would be seen as a sign of underlying strength, further underscoring the pair’s strength.
However, volatility has the potential to become a factor later today, as the U.S. is set to release September CPI data at 8:30am EST. Consensus estimate for Sept. CPI is 0.3%, while the Core CPI consensus forecast is at 0.2%. This will be a key metric in the Federal Reserve’s decision to raise rates before the end of the year, a factor that will have bearing on the dollar. As of Monday’s close, Fed Fund futures were indicating a 69.5% chance of a rate increase at the December meeting. Other data releases in the U.S. this week include Housing Starts/Building Permits at 8:30am EST on Wednesday, and Existing Home Sales at 8:30am on Thursday. This week’s schedule is also heavy with speaking engagements by Federal Reserve officials. Fed Vice Chair Stanley Fischer spoke Monday and reiterated concerns that low interest rates may leave the U.S. economy vulnerable to shocks. On Wednesday, the Fed will release its latest beige book, a review of regional economic conditions. The Fed’s Williams and Dudley will also speak this week.
Should sellers step in, daily support stands at the 102.81/102.86 area, defined by the October 7/10 lows, which correspond to a 38.2% retracement of the advance from the September low. A retest of this level would represent a minimal correction, leaving the pair well-positioned to recover and resume the advance. A 50% retracement of the advance from the September low comes in at 102.30, while a 61.8% Fibonacci retracement is at 101.75. At present, with the bias to the upside, the 38.2% Fibonacci retracement is expected to hold on any near term downside reactions.