JPY - Who can say "No" to a perfect "Head and Shoulders" trade

The Russia - Ukraine war is de-escalating and thus the safe heaven Dollar is weakening. The Japanese Yen has also been weakening in the past few months due to the Bank of Japan's fiscal policy. In its latest monetary policy meeting in March, the Bank of Japan maintained its ultra-accommodating monetary policy and did not raise its negative interest rate from -0.10%. The difference in interest rates with other major Central Banks, especially with the Fed and the BOE, places the Yen at a disadvantage driving its price down.

The BOJ Summary of Opinions was published on Tuesday, which includes the Central Bank’s projection for inflation and economic growth and is the primary tool the BOJ uses to communicate its economic and monetary projections to investors. In the report, Japanese policymakers, including Haruhiko Kuroda (photo) stated that inflationary pressures are building in Japan, with inflation growing to 1%, which is still far from the BOJ’s 2% target. Bank of Japan board members seemed sceptical about the rise in inflation though, expressing doubts on whether the rise was sustainable. They stated that the rise in inflation rates would likely prove to be temporary, and was mainly due to the rising cost of imports, especially energy-related imports. Policymakers concluded that the BOJ must continue its ultra-accommodating fiscal policy, to support the economy.

Of course currencies are not easily predictable in the short term, but the current situation favours the strengthening of the JPY versus the US Dollar.

The Technicals - Head and Shoulder formation on the 1h USD/JPY timeframe

Loading the USD / JPY on cTrader, we can clearly identify a "head and shoulders" pattern formation. This traditional trading pattern identifies three key points, a "left shoulder", a "head" and a "right shoulder". It's a reversal formation found in the end of a trend, and it shows that there is not enough momentum to continue the trend. The "right shoulder" fails to keep the momentum of the "head".

Head and Shoulder formation

The traditional way to trade a head and shoulders formation is as a reversal, hence, go short when after identifying the formation, and target at least as much pips as the distance from the "Neckline" which is the resistance at 121.53 to the highest point of the trend which is 125.08.

That means that the target should be at least 300 pips, represented by the Green parallelogram. Obviously you can go for more pips, depending on the developments in the markets.

If you are margin trading, it's advisable to use a Stop Loss to protect your account from Stopping out. The Stop Loss area is represented by the red parallelogram. You can place your Stop Loss anywhere from 123 to 126 depending on your risk to reward ration. The higher you place it, the more difficult it will be for it to trigger, but the more funds from your account you will be risking.

Don't forget to check out our exclusive daily market analysis by Myrsini Giannouli at https://topfx.com.sc/en/daily-market-digest

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