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The USJPY is within a trading range, with 111.20 acting as key support

For trend following traders, the USDJPY is showing some signs of promise that it can once again make a directional move after being in a sideways range-bound grind for almost 4 years. A break to the upside of that channel in May 2021 once again resulted in a sideways market so taking out recent swing highs is critical for a continuation higher and to attract more buyers.

USDJPY Forex Analysis

At the time of writing, the USDJPY is sitting comfortably around support in the area of 111.20-111.30, and the market structure indicates that the price action is in the process of correcting itself. Bullish momentum is strong and the 20, 50, and 200-period moving averages are stacked in the right direction for a continuation higher. There is still a chance that the recent swing highs and 112.00 are breached and the USDJPY continues pushing for higher highs.

If bids were pulled and the price fell, the moving averages would probably provide some level of support, and a measured move would be needed to see price travel through 110.80 and the next level of importance. The rising 200-period moving average and the 110.30 level would then be a great target to the downside with a high probability of a move into the middle of the largest trading range terminating at the 161.80 Fibonacci extensions.

It is never advisable to trade against the trend, so make sure that you don’t jump in too early by waiting for a break of the market structure.

The underlying macroeconomics and related assets provide clues to the direction in which the USDJPY may move. Yen and gold normally act in a safe-haven fashion when risks are high, with USDJPY and gold usually having an inverse relationship. Gold is under pressure from the strong US dollar, but benchmark yields are also contributing a lot to this. All asset classes are currently being driven by the debt markets, which have an inverse relationship with treasury yields. Yesterday the yellow metal rose in tight trading on a decline in US 10 year treasury yields, but a stronger dollar dampened gains for the safe-haven metal. Investors will be watching the US labor market for further guidance this week, so the direction in all these markets is likely to be sideways until after Friday.

As inflation measures have proven less transitory than first expected, US 10-year yields have been increasing amid expectations of monetary policy tightening from the Federal Reserve. Most of it is related to disruptions caused by a global pandemic that has a long way to go before it can be resolved. The countries that were under lockdown for longer are beginning to open again, so progress is being made, and vaccinations are showing that death rates can be reduced, showing that there is at least light at the end of the tunnel.

As for getting the globe back to its pre-pandemic state, it will take some time, if not years. In response to the announcement from the Republicans that they would support the extension of the debt ceiling into December, the short-term yield curve declined. An extension would avert a historic default later this month. As the long-end rates fell, the yield curve flattened, with the spread between two-year and 10-year yields narrowing to 122.51 basis points.

Also, the USDJPY appears to be following the energy commodity markets higher, with Oil moving in a similar manner more so than Natural Gas. As the US dollar index falls, the price of oil is likely to rise in line with the dollar-denominated commodities. Although the US dollar and the price of oil have both fallen and risen together throughout the year 2021. USDJPY could also fall if the oil price has peaked. Currently, the oil markets are struggling to balance supply and demand, with inflation. Higher oil prices will eventually be rejected. The restrictions on supply will eventually be loosened, but before that happens the demand must prove its strength. Rising USDJPY would suggest risk-on markets, which would be expansionary, and therefore oil demand would rise.

In data out yesterday from the US Department of Energy, the US crude inventories climbed unexpectedly, and prices in oil dropped, pulling back from multi-year highs. Crude oil stocks in the US rose by 2.3 million barrels last week, against an expectation of a modest decline of 418,000 barrels.

As seen from the sentiment indicator on the ActivTrader platform, a slight lean towards the downside appears to be preferred by traders, while judging from the first chart, it seems most likely that we will test those value areas lower. On a daily chart, today's price action is within the range of the previous day's indecision. In the event that this market doesn't move until after tomorrow's employment data, a break of today's low or high will determine the direction for the remainder of next week and probably into next week.

As the next couple of days and weeks progress, keep an eye on how the US dollar, gold, and Treasury markets are shaping up. Finding levels of previous support turning into resistance and vice versa will help us make decent trades when taking into account market fundamentals and technical trends.

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