- Escalating U.S.-China tensions are likely to cap further gains in USD/JPY
- The USD/JPY bulls have recovered to force a retest of the broken support at $106
- A failure here would likely prompt a rotation lower as $102 remains the bulls' target
USD/JPY price has failed so far today to clear the resistance around $106. Overall, the U.S. dollar climbed against the Euro and Swiss franc as the fiscal incentives in the United States and escalating U.S.-China tensions caught investors’ attention.
Fundamental analysis: Tensions rising
The dollar index is recuperating after a bad run that sent it down 4% last month. The index recovered on Friday after news about jobs eased concerns regarding the U.S. labor market.
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After discussions about the next fiscal stimulus fell apart, the U.S. President Donald Trump signed executive orders on August 8 to partially reinstate the unemployment benefits for millions of unemployed American citizens.
The dollar index held its ground in the Asian session but climbed 1% to 93.532 in London. Weekly futures data showed that speculators stepped up their net short dollar positions last week.
“A little stimulus is simply better than none at all. At least that is how the market seems to see it, which is why the U.S. dollar is trading moderately stronger,” wrote Thu Lan Nguyen, an analyst at Commerzbank.
Recovery of the greenback was fueled by intensifying tensions between the U.S. and China, following Washington’s decision to introduce sanctions on senior Hong Kong and Chinese officials. China reacted to the decision by imposing sanctions on 11 U.S. citizens and lawmakers.
The top United States and Chinese officials will hold discussions via teleconference on Saturday to discuss the introduction of the Phase 1 trade deal.
Technical analysis: USD/JPY retesting the broken support
As written in July, USD/JPY price moved lower after the head and shoulders chart pattern was activated. The activation of this bearish chart pattern opened the door for a move to below $103 in USD/JPY price.
The bulls have recovered in the meantime to force a throwback – a retest of the broken support, now acting as resistance. Judging by today’s price action, the buyers have so far failed in trying to clear this level. A continuous failure at $106 is likely to force a rotation lower towards $102 where the head and shoulders pattern should be completed.
The U.S. dollar advanced on rising tensions between the U.S. and China and Washington’s decision to restore unemployment payments. USD/JPY price is now testing the broken support as the buyers attempt to get back above $106.