USDJPY broke out of its double bottom formation on the 1-hour time frame, signaling that a reversal from the previous downtrend is about to take place. 

However, price has encountered resistance near the 112.00 major psychological level and might be due for a pullback.

Using the Fibonacci retracement tool on the latest swing low and high shows that the 61.8% level lines up with the broken double bottom neckline, which might now hold as support. This is also near the moving averages, which usually act as dynamic support areas.

The 100 SMA is above the longer-term 200 SMA on the 1-hour time frame, confirming that the path of least resistance is to the upside. However, stochastic and RSI are still heading south so USDJPY could follow suit. Once these oscillators reach the oversold region and turn higher, buyers could push price back up to the previous highs.

Event risks for this setup this week are the central bank decisions in the US and Japan. The Fed is set to make its monetary policy announcement on Wednesday while the BOJ will have its statement on Thursday. No actual policy changes are expected from the Fed while some traders are predicting that the Japanese central bank could announce additional stimulus following the recent earthquakes.

Keep in mind as well that the BOJ’s previous rate cut to negative territory didn’t have a sustained impact on the Japanese currency while jawboning attempts from finance officials also spurred further appreciation.

Top-tier reports from Japan are also lined up towards the end of the week, which suggests additional volatility for USDJPY. These include preliminary industrial production and retail sales data. As for the US, its advance GDP reading is due on Thursday and slower growth of 0.7% is eyed.

By Kate Curtis from Trader’s Way