USD JPY maintains downside risk after breakdown

USD/JPY continued to be pressured to the downside on Thursday after breaking down a day earlier below a prolonged triangle consolidation pattern. The currency pair dropped down to closely approach its first bearish target around the 118.00 level early Thursday before paring some of those losses later in the day.

Despite US inflation and unemployment data on Thursday morning that helped to provide some support to a weakened dollar, USD/JPY continued to be weighed down on increased yen buying.

Weekly US unemployment claims came out at 255K, significantly better than the 269K previously expected and the lowest level in 42 years. US inflation data in the form of the CPI came out at -0.2%, in-line with expectations. The core CPI, however, which excludes volatile food and energy prices, was higher than expected at 0.2% versus expectations of 0.1%. Equities on Thursday morning were relatively steady, with the S&P 500 eking out some moderate gains.

Having dropped below its previous consolidation that had been in place since the equities-driven plunge of late August, USD/JPY continues to be at risk of further downside. Bearish momentum has been firmly in place since that August drop. This momentum has been technically confirmed with a cross of the 50-day moving average below the 200-day moving average earlier this month. This is termed a “death cross” in technical parlance – it has been well more than a year since any such cross last occurred.

In the event of more yen-buying in reaction to a potential return of volatility in the equity markets, coupled with a further pullback of the US dollar on market expectations of a delayed Fed rate hike, USD/JPY could well be at significant risk of further losses. On any sustained breakdown below 118.00 support, the next major target to the downside is at the 116.00 level, which was last approached during the noted August plunge, followed by the 113.00 support objective.