USDJPY provides potential trade after holding a key Fibonacci level

The USDJPY has been in an extremely strong upward trend since September 2021. This pair’s recent price action has also been charactarised by relatively weak retracements as it has trended higher. Inflationary pressures have acted as a strong catalyst for the USD against most other currencies further aided by the Federal Reserve taking a strong stance against inflation with a series of aggressive interest rate hikes. At the same time, the JPY has remained weak as the Central Bank of Japan has refused to intervene and shift from its dovish stance.

The most recent retracement shows the potential for a good risk/reward Long trade. On the chart, it can be seen that the price has pulled back to the 23.60% Fibonacci level, which is at 132/133JPY. This area also doubles as a support zone with the prior resistance level becoming a level of support which is another sign that the trend may continue.

On the weekly chart, the characteristics of the candlesticks near the support zone also support the premise that the price may bounce. The candles have long wicks touching the support area indicating that the buyers are soaking up the supply. They have also closed near their opening price again showing how buyers are soaking up the supply.

The 4-hour chart shows a consolidation of the price forming a triangle, with the potential to break out to the upside. This may provide an alternative entry signal for the same overall strategy. An important aspect to remember when trading this strategy is to ensure that price occurs with relatively high volume. Large volume indicates that buyers are regaining control over the share price, and that sellers have become exhausted.

Potential risks

There are some risks with this trade. Firstly, the pair is already quite overextended with the price at multi-decade highs. In addition, with US inflation fears potentially easing and interest rate hikes priced in already, the current price may be near its peak.