USD JPY falls on dollar pullback China stock plunge

USD/JPY (daily chart shown below) dropped to hit a low of 123.00 on Monday as the US dollar fell broadly against other major currencies and demand for the safe haven yen ticked up slightly. This occurred after the Shanghai Composite Index closed more than 8% lower, unnerving investors and rattling global equity markets.

Prior to Monday’s plunge, USD/JPY had already been drifting lower during the past week from its latest highs near 124.50 resistance. That high was reached after a run-up in mid-July that was caused by a strengthening dollar and easing concerns over both China’s equity market turbulence and the Greek debt crisis.

With a dollar pullback and a renewed plummet in China stocks to start the new trading week, USD/JPY has dropped below its 50-day moving average once again and approached a key uptrend support line extending back one year to lows in July of last year.

While the long-term trend for USD/JPY currently continues to remain to the upside with the currency pair having reached a 13-year high of 125.85 as recently as June, any continued turmoil in China stocks and a further pullback in the strong US dollar could prompt further losses for USD/JPY.

In this event, the next major downside target is around the key 122.00 support level, which was historically a major resistance level and now continues to be an important support level. Any break below 122.00 could push the currency pair down towards a re-test of July’s lows around 120.40, followed by the 120.00 psychological support level. To the upside, key resistance continues to reside around the noted 124.50 level.