After rallying strongly last week, it appears that USDJPY could be in for a reversal as a head and shoulders pattern can be seen on its 1-hour forex chart. Price is currently testing the neckline of the formation, still pending a breakdown and confirmation for the potential selloff.

The drop might last by close to a hundred pips, which is the same height as the chart pattern. A selloff below the 103.75 zone could take the pair down to 103.00 or possibly until 102.75. Stochastic is moving lower, indicating that sellers are in control of price action for now.

Shorting at 103.75 and aiming for 102.75 with a tight stop above 104.00 could yield at least a 3:1 return on risk.

Bear in mind though that the BOJ has recently shown signs of considering further easing, as Governor Kuroda admitted that the economy could use stimulus if inflation starts to weaken again. Meanwhile, Yellen sounded less dovish than usual and acknowledged that consistent improvements in the economy could push the Fed to tighter earlier than anticipated.

Important Japanese economic reports are up for release at the end of the week and this could show whether or not the country is still seeing weakness in data after the April sales tax hike.

By Kate Curtis from Trader’s Way