USDJPY’s short-term climb might soon be reversed, as price formed a double top pattern on its 1-hour time frame.

The pair made a couple of failed attempts to break past the 118.75 area and found support at the 117.50 minor psychological level, which is the neckline of the formation.

Price is currently testing the neckline and may be due for a downside break, possibly until the next support area at the 116.00 major psychological level. The chart pattern is approximately 125 pips in height, which suggests that the resulting breakdown could be of the same size.

If the neckline holds as support though, price could make its way back up to the previous highs around 118.75 and create another top. This would form a triple top pattern, which is still a valid reversal signal. However, this could also be a sign that the pair might keep moving sideways inside a range.

Stochastic is moving up, indicating that buyers are in control and that the neckline support might still hold for now. Event risks for this USDJPY setup include the FOMC statement mid-week, which might indicate that the Fed is still open to tightening sometime this year.

On the other hand, a change in Fed rhetoric might also be possible since most major central banks are shifting to a dovish stance. Just recently, the SNB announced another cut in deposit rates while removing its franc peg while the Bank of Canada surprised with an interest rate cut. Last week, the ECB decided to announce a massive quantitative easing program while central banks from emerging markets also eased monetary policy.

If the Fed stays hawkish, USDJPY could bounce back to the previous highs and perhaps make an upside break. If the Fed sounds a little downbeat, a neckline break is possible and a move to 116.00 might take place.

Other event risks for this setup include the release of Japan’s CPI readings and industrial production data at the end of the week. Strong figures could lead to more yen demand as it would support the BOJ’s decision to keep monetary policy unchanged for now.

By Kate Curtis from Trader’s Way