So, Donald Trump finally spoke and down went stocks and the dollar. Shares of biotech stocks took a hit after the President-elect signalled that his U.S. government would negotiate aggressively on the price it pays for drugs. The U.S. dollar/Japanese yen (USD/JPY) currency pair, which tends to correlate positively with stocks, slumped. Meanwhile, the EUR/USD and even the GBP/USD surged higher. Perceived safe-haven and dollar-denominated gold and silver bounced back sharply. As we go to press the dollar was still weaker on the day, but off its worst levels.
As mentioned in my previous report, there are no fresh catalysts to drive the dollar higher in the short-term. So we may see the US currency weaken further in the days to come. However, the greenback remains well supported in the long-term as the Fed continues to be the only major hawkish central bank out there. The next potential catalysts for a dollar move are a speech by Fed Chair Janet Yellen on Friday and U.S. CPI on Wednesday.
From a technical perspective, the USD/JPY has spent the best part of the last 4 weeks trying to work off ‘overbought’ conditions after its impressive rally came to a halt at end of last year. That rally stalled at a long-term resistance zone between 117.65 and 118.75. As can be seen on the chart, this was the area between the open and low of last up candle prior to the down move (circled) which preceded the drop to 100. It was here where the selling had started, in other words. Given the extent of the drop from here and also the size of the rebound, traders were always going to respect this resistance zone: buyers took profit on their longs, sellers initiated new shorts.
Consequently, the USD/JPY has pulled back noticeably from this 117.65/118.75 area to drop to a low so far of 114.25.
The break of 116.00 support, if sustained, could see the USD/JPY drop to at least 113.80 and below that the next line of defence is at 111.45. These levels were previously resistance and so they could turn into support upon re-test. At this stage, a weekly close above 117.65-118.75 is needed for the long-term bullish trend to be re-established. Either that, or a distinct reversal pattern at these slightly lower levels, ideally around the above-mentioned supports, needs to be formed before we potentially see the next leg of the up move.