USD/JPY Fails to Pierce Resistance, but a Breakout Remains a Strong Possibility

• USD/JPY has probed the 111.00 area in the last few days, but has been unable to break that resistance decisively.

• Busy economic calendar this week could pave the way for a strong move in the US dollar

• In this article we present the most relevant technical levels for USD/JPY in the short term

The hawkish pivot by the FOMC at the June meeting triggered a moderate rally in the US dollar, but follow-through buying appears to have waned as several central bankers have stressed the need for patience in withdrawing stimulus. As a result, USD/JPY has lacked directional conviction and failed to break above the 111.00 technical resistance area. Regardless of what has happened recently, the pair could make a big move in the coming days due to high-impact economic data on the calendar and month-end flows.

While there are several key releases to watch for, the most important will be the June nonfarm payroll report (NFP), scheduled for Friday, just ahead of the Fourth of July Independence Day holiday. This year, Independence Day falls on a Sunday, so it will be observed on Monday, July 5, with markets closed on that day. As the long weekend approaches, trading activity is likely to thin out as investors take time off for a short vacation. With volume falling, it is vital to follow market developments closely, as an unexpected headline or news item, whether positive or negative, can exacerbate volatility.

Turning to the NFP report, consensus points to a 700K increase in employment, although some estimates suggests the economy may have created 1 million jobs. Given that services sector has normalized further and that several states have phased out or began talking about eliminating enhanced unemployment benefits during the first weeks of June, there is a slight bias toward a better-than-expected employment outcome. In this regard, anything close to a million new payrolls could strengthen the case for monetary tightening, leading to a strong move higher in the US dollar.

On the flip side, a disappointing NFP print could lead traders to price in a delay in QE tapering, depressing long-term treasury yields and reducing the attractiveness of the US dollar in the FX market, at least temporarily. This could trigger a moderate pullback in USD/JPY.

From a technical point of view, USD/JPY has tested the 111.00 psychological level a couple of times in the last few days, but has been unable to break above it decisively, a sign of strong resistance in this region. For USD momentum to build, we would need to see a sustained move above that barrier in short order. A clean breakout could reignite speculative interest in short yen positions and boost the USDJPY towards the next cluster resistance, starting at 111.72 (March 2020 high) and stretching up to 112.23 (February 2020 high).

Alternatively, if sellers manage to regain control of the market and USD/JPY slips below 110.15 (support defined by a six-month rising trendline extended from the January low), price could head towards 109.25. A break below this level could fuel the next leg lower and expose the 108.35 area.