USDJPY is poised to perform with likely re-test of the 111.60/80 levels - TDS

In view of the analysts at TDS, with markets likely to adopt a risk-on mind-set to begin the week, USDJPY is poised to perform and they view a re-test of the 111.60/80 pivot as likely, but also a critical litmus test to see a more prominent topside extension into a descending wedge established from the 2017 highs.

Key Quotes

“A credible break above this zone would have us look towards 113.00/50. Recall however that risks in the US could act as a limiting factor for overall risk sentiment with Congress returning today with only four days to avoid the deadline of a government shutdown. We think 110.00 and 108.70 supports should hold.”

“Elsewhere, EURJPY should see the most topside support into the start of the week. The 100-DMA looks to act as first resistance around 120.68 but we think an extension to 122.00 is probable where we spot more significant trend resistance. Nonetheless, as markets begin to focus on the longer-term repercussions of a diminished Frexit scenario and eventual pivot towards taper by the ECB, we acknowledge there could be a greater shift topside.”

“From a longer-term strategic perspective, with an eventual shift by the ECB on our radar (we expect taper to be announced in the autumn), we see greater confidence that a rotation out of strategic USD longs towards the EUR will take place. While the Fed still appears set to normalize rates by another 50bps this year, we think, and the risk of balance sheet reinvestment adjustment occurring before the turn of the calendar year, we think the shock value offered from the Fed has become substantially less for markets to digest. This leaves the shift by the ECB as the lynchpin towards the rotation trade and underscores our FX outlook that calls for the multi-year uptrend in the USD to come to an end later this year.”