Executive Summary:
- USDJPY rally is nearly over if it hasn’t completed already
- A break below 151.27 hints the top is in
- Once the high is in place 134 is a downside target
Elliott Wave Pattern on USDJPY
Yesterday, the Fed cut interest rates 25 basis points. Additionally, the street is expecting another 25 basis point cut at the December meeting. This could become a drag on USDJPY due to the contracting interest rate differential between the Fed and BOJ.
Though USDJPY has rallied higher than we forecasted on in “USDJPY Nears the Top of the Hill”, the minimum waves are in place for a major top.
Starting with the weekly chart, we can view a completed Elliott wave pattern at the June 2024 higher. Once USDJPY broke below the lower trend line of the parallel price channel, prices are returning back to the underside of the trend line.
We can clearly view an impulse decline to the August low and we are counting that as wave ((i)). Since then, prices have been grinding sideways to higher. Wave (a) of ((ii)) rallied to the 38.2% Fibonacci retracement level. Then, wave (b) briefly pushed below 141.68 making the pattern an expanded flat. Then, wave (c) has rallied as an impulse wave reaching the 61.8% Fibonacci retracement level of the summer’s decline.
Heading into this week’s high, we can spot divergence on the Relative Strength Index (RSI).
Also, as this week’s high formed, it also created a rising wedge pattern suggesting a decline was nearby. In Elliott wave terms, a wedge pattern is considered a diagonal. The positioning of this diagonal would make it an ending diagonal and they tend to be swiftly retraced.
The subsequent decline from this week’s high could classify as a swift reversal.
As a result, the minimum waves are in place for a wave ((ii)) top leading to a strong wave ((iii)) decline.
Should the wave ‘iv’ low at 151.27 get broken to the downside, then there will be additional evidence pointing to a major top.
If prices rally above this week’s high, then wave ‘v’ is extending higher, likely containing two more highs.
Once the top is in place, we can apply the Fibonacci extension tool to determine how far the wave ((iii)) might travel. If this week’s high is the top, then the 100% extension appears near 134.40 and the 161.8% extension is near 122.
Bottom Line
The minimum waves are in place for USD/JPY to have topped in wave ((ii)) and begin wave ((iii)) lower. If USDJPY breaks 151.27, then the evidence builds that the top is in and downside targets would include 134 and possibly 122.
If this week’s high is broken, it will likely represent micro wave 3 of v with another micro wave 5 of v on the horizon.
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