USDJPY Correction Setup (Oct 16, 2015)

Price has dipped to the 118.00 area before showing signs of a pullback, possibly until the broken support near the 50% Fibonacci retracement level.

The pair appears to be finding resistance at the area of interest around 119.00 to 119.25 and might be ready to resume its drop back to the previous lows soon. Increased selling pressure might even lead to the formation of new lows around the 117.00 levels.

On the other hand, stronger buying momentum might spur a larger correction until the 61.8% Fib or the 119.50-120.00 psychological levels closer to the moving averages. Stochastic and RSI are already heading down from the overbought zone while the 100 SMA is below the 200 SMA, indicating that the downtrend is about to resume.

Data from the US came in mostly better than expected yesterday, reviving talks of a Fed rate hike before the end of the year. The relief rally was probably spurred by stronger than expected core CPI data, which indicated a 0.2% gain instead of the estimated 0.1% uptick. The headline CPI figure came in line with expectations of a 0.1% drop.

Meanwhile, initial jobless claims also came in better than expected, suggesting a possible rebound in hiring and better jobs data later on. This could keep the Fed on track to hiking rates in their October or December policy announcement, which might keep the dollar afloat for the rest of the year.

However, traders are still mindful of the weaker than expected US retail sales data released earlier in the week, along with disappointments in the latest earnings figures. Dismal results could keep dragging equity indices lower, forcing the Fed to rethink their tightening plan for fear of derailing the ongoing recovery.

By Kate Curtis from Trader's Way