USD/JPY is moving lower in today’s trading, breaking below a rising trendline on the 4-hour chart with a decline to 103.30 level, down about half a percentage point from Tuesday’s N.Y. close. Earlier in the session, data showed that Japan’s all industry activity index advanced by 0.2% on a monthly basis in August, on par with market expectations and compared to a rise of 0.3% in the prior month.
At present, the pullback is still seen as a reaction to the extreme overbought condition that developed as a result of the advance to the October highs. The pair gained approximately 4% in the move from the late September low to the October high, lifting the Stochastic, a price momentum indicator, to an extremely overbought level. The indicator has since dropped below an overbought reading at 80, but remains elevated. Thus, the near term bias could remain to the downside, with a test of first support playing out over the short term.
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. The 100-day moving average is in the same vicinity. A drop to this level would represent a minimal retracement of the October advance, leaving the pair well-positioned to recover and resume the rally. Holding steady at the 38.2% retracement level would offer a buying opportunity in the pair. On a further move lower, 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.
However, a sustained break above the recent high at 104.64 is required to suggest a bottoming formation has been established, as such a development would also confirm a breakout above the early September corrective top. On such a move, the target becomes 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 dollar is currently under pressure, also working off what became an extreme overbought condition. DXY, however, has yet to break any significant support levels. Thus, the broader bias remains to the upside. The release of U.S. CPI data for September was mixed and slightly mitigated the potential for a rate hike by the Federal Reserve in December. As of Tuesday’s close, Fed Fund futures were indicating a 65% chance of a rate increase at the December meeting, down from 69% as of Monday’s close.
On today’s U.S. calendar, Housing Starts/Building Permits will be released today at 8:30am EST, while Existing Home Sales are due Thursday at 8:30am. Also, today the Federal Reserve will release its latest beige book, a review of regional economic conditions.