USD/JPY Forecast: Key Levels To Watch Out For - 113.50 & 114.45

The Dollar-Yen pair closed last week at 113.50; the highest (weekly close) since early July, largely on the back of renewed US tax reform hopes. The risk-on action in the markets and expectations that PM Abe will retain majority also kept the Yen under pressure.

Profit taking

The pair gapped higher and clocked a three-month high of 114.10 in the Asian session today as Abe's victory, though priced-in, was a relief to some extent in a sense that it has kept the doors open for more monetary stimulus in the future if required. Currency devaluation and fiscal stimulus have been the cornerstones of Abe's fight against deflation.

However, as stated earlier, the markets had offered Yen in the run-up to elections on hopes that Abe would come out victorious. The shorts are being unwound (profit taking/sell-the-fact trade), thus, the spot fell back below the 114.00 handle. Currently, it is trading at 113.70.

Focus on equities & 10-year treasury yield

Geopolitical tensions persist. UK media reported in early Asia that the US is preparing for nuclear war readiness for the first time since the cold war years. Elsewhere, Catalonia is considering the declaration of independence after Madrid imposed direct rule. The yen may find bids if the equity markets react negatively to the geopolitical concerns.

The US 10-year treasury yield neared 2.4% on Friday for the first time since early Oct. 6. Another failure to take out the critical resistance could yield sell-off in the USD/JPY pair.

Technical Overview - Losses likely below 113.50

Weekly chart

• 114.33 (the 61.8% Fib R of Dec 2016 high - Sep 2017 low)
• 114.00 (psychological level)
• 113.97 (the 23.6% Fib R of June 2016 low - Dec 2016 low)
• Resistance offered by the trend line sloping downwards from the March high and the July high

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