USD/JPY Forecast: Is the risk-on a trap? Falling channel still intact

USD/JPY gapped higher at 110.52 this Monday morning after Le Pen finished behind Macron in the first round of the French elections. The outcome was largely in line with that poll had predicted.

Still, the Yen was offered, while EUR and other risk assets rallied as the French voters made sure the Melenchon did not make it to the second round with Le Pen.

Risk-on could be a trap

The risk-on is more of a relief rally, which means short risk asset positions and long safe haven positions/hedges initiated on fears of Le Pen-Melenchon victory are being squared off.

This is evident from the Dollar-Yen pair, which now trades at 110.00 levels. Friday’s close was 108.95. Another 100-pips drop from the current level and gap would be filled.

The spot may revisit an Asian session high of 110.52 ahead in the day as European and North American desks respond to the French Election relief. However, on a larger scheme of things, the outlook remains bearish, given the falling channel pattern on the daily chart.

The risk-on could be a trap; still the support at 108.13 is likely to remain intact in the short-run… this is because-

Polls have regained credibility

The polls finally got it right this time after last year’s Brexit referendum and US election disaster. The lost credibility has been regained, thus markets are likely to take the polls more seriously than they did before the results of the first round of elections.

As per the latest polls, Mr. Macron is forecast to beat Ms Le Pen by 62% to 38%. As long as Macron maintains a healthy lead, the odds of a bearish break in the USD/JPY pair below 108.13 are low…

The other factors that could trigger a break below 108.13 are increased tensions between US-Russia, US-North Korea-China.

Technicals – Falling channel intact

Daily chart

  • Despite the bullish crossover on the MACD and the turnaround the RSI, cautions is advised, given the pair failed to take out the falling channel resistance in Asia.
  • Only break above the falling channel hurdle seen at 110.60 would open add credence to the bullish indicators and open doors for a re-test of 112.21 (Mar 31 high).
  • On the downside, support at 108.13 could be put to test if the spot closes below 109.67 levels today.