The USD/JPY was one of the strongest trending pairs of 2010 as it dropped from its 2010 HI of 95.00 in March to its 2010 LO of 80 by October. The pair tends to move in a much less volatile manner than other pairs such as EUR/USD and GBP/USD, so the run down in USD/JPY was smooth and clean.
After reaching its low of the year in October, USD/JPY has mostly moved in a tight sideways pattern of consolidation from October 2010 to February 2011 between a HI of 84.30 and the low of 80.00. At this point, many fx analysts are calling for USD/JPY to rise in 2011 due to several reasons.
Improving U.S. Economy
One of the primary drivers of dollar weakness during the last 8 months of 2010 was weakness in the U.S. economy. The Federal Reserve had to move forward with a second round of quantitative easing in November 2010, and this served to drive the dollar down considerably versus other currencies. This dollar weakness was especially evident against the yen.
Currently, however, the United States economy is showing signs of continued recovery. Unemployment is finally beginning to improve, albeit slightly, and economic growth as measured by gross domestic product is in line with market expectations. This improved outlook for the U.S. economy should help the dollar rise against the yen during 2011.
Japanese Recovery
The Japanese economy is continuing to struggle to find a strong economic recovery. Its sovereign credit rating was recently downgraded, and this caused a massive sell-off in yen and a rise in the dollar. This continued. As this spread between the recovery in the U.S. and Japan widens, it should serve to put further upside pressure on USD/JPY.
Current Technical Picture
The USD/JPY has been making a strong move to the upside during the month of February, and it is currency fighting to attack major resistance at 84.30. Notice in the chart above, that price has taken out the previous HI. This is very important. The last Daily candle that closed, closed very strong, bullish, and above the previous HI. This should lead to a move up to the 84.30 area in online currency trading.
There is a very interesting pattern developing in the price action you see in the chart above. Notice that the lows are connected by the red diagonal line. Also notice that each low is higher than the previous one. This means we have very clear higher lows in place, which is a bullish sign. Now, notice that the HI’s at 84.30 are straight across. In classic technical analysis, this pattern is known as an ascending triangle. Typically, in an ascending triangle pattern, price will eventually break through the horizontal resistance line. The idea is that each time price is rejected from the HI’s and comes lower, it is finding support at higher and higher prices. This is why there are higher lows. Eventually, this higher support will draw in enough buyers to break through the overhead resistance at 84.30.
Next Area of Strong Resistance
The next area of strong resistance beyond the 84.30 area for USD JPY will be the 85.00 level. Not only is this is a major psychological area, but it is also very strong historical support and resistance, and USD/JPY will most likely face a battle to get through that level.
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