USD/JPY Price Forecast: A Deep Drop to 100 Cannot Be Ruled Out

  • USD/JPY is back in consolidation mode after the deep flash crash drop on Wednesday evening.
  • The ongoing political stalemate is not helping the greenback in maintaining upside.
  • House of Representatives agree on legislation to end government shutdown; however, it is unlikely to pass in Senate.

USD/JPY price action has entered a form of consolidation, this coming after the excessive volatility seen late on Wednesday. The market was hit by what many called a mini flash crash, as USD/JPY spiked lower by almost 500 pips. All JPY instruments saw this deep fall, which came coincidentally after huge tech giant Apple slashing Q1 guidance. Upon this, news of a China slowdown could have spooked participants.

Rising Wedge Pattern

USD/JPY 1-hour chart. Price action moving within a rising wedge formation, subject to a break lower.

Keeping in mind the recent price behavior, it is moving within the confinements of a rising wedge pattern. This can be observed via the 1-hour chart; it started to take form on 2nd Jan, as the market stabilized post the flash crash. Should this be playing out to a textbook move, then vulnerabilities remain pointed to the downside. The lower supporting trend line can be seen tracking around the psychological 108.00 level.

US Government Shutdown Latest

On Thursday evening, the House of Representatives got together to approve a legislation that would bring an end the government shutdown in the U.S. They completely disregarded President Trump’s demand for $5 billion to build his boarder wall.

In terms of the details, this legislation they agreed, includes a bill which would fund Homeland Security at current levels until 8 February. However, not the additional $5 billion that President Trump has demanded to construct a wall on the Mexico border.

The funding would also cover the government departments which are affected by the partial shutdown, including agriculture, transportation and interior. Despite this being agreed, it looks very unlikely to pass into law. Democrats could be heavily outnumbered in the Senate.

Technical Review

USD/JPY weekly chart. Large weekly support eyed at 104.65.

As detailed, eyes are on an extended move to the south, as it doesn’t appear USD/JPY has fully escaped the big low produced at around 104.65. It is worth noting, this level USD/JPY touched during the flash crash moment, is a large monthly support level. This was last hit at the back end of March 2018, support for week of 19th March and 26th March.

A retest and breakout of the above mentioned critical weekly level could see the door wide open for large selling pressure. The next major demand south of this would then see the psychological 100.00 mark come back into light. USD/JPY last traded down in this territory back between June to September 2016.

Featured image courtesy of Shutterstock.

Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.