The following is a rewritten and expanded version of the article originally published on City Index by Matt Weller, focusing on the USD/JPY and USD/CHF currency pairs and their current upward momentum driven by reversal patterns and yield differentials.
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**USD/JPY and USD/CHF Outlook: Technical Patterns and Yield Differentials Suggest Continued Upside**
By Matt Weller (Original Author)
The US dollar continues to show strength against its counterparts, with two pairs – USD/JPY and USD/CHF – gaining particular attention due to technical reversal patterns and favorable yield tailwinds. With central bank policies diverging and shifting risk sentiment in global financial markets, traders are closely monitoring these pairs for potential opportunities. In this outlook, we break down the major drivers behind the momentum in these two forex pairs and assess the potential for further upside.
## Context: Recent Moves in FX Markets
The US dollar has found support amid strong US data, elevated Treasury yields, and cautious risk sentiment. As the Federal Reserve maintains a higher-for-longer stance on interest rates to combat persistent inflation, the yield differential between the US and other nations, notably Japan and Switzerland, has widened further. This divergence continues to support the USD versus lower-yielding counterparts such as JPY and CHF.
Key macroeconomic themes underpinning recent USD strength include:
– Stubborn US inflation data keeping tighter monetary policy on the table for longer
– Hawkish commentary from Fed officials hinting at delayed interest rate cuts
– Rising US Treasury yields driven by resilient economy and restrictive monetary policy
– Dovish or neutral stances from the Bank of Japan (BoJ) and Swiss National Bank (SNB)
These factors combine to create a yield-based tailwind favoring the US dollar, bolstering USD/JPY and USD/CHF, particularly as these central banks maintain accommodative monetary policies.
## USD/JPY Technical Analysis: Momentum Reasserts Bullish Dominance
The USD/JPY pair remains under the spotlight as it reclaims bullish momentum following recent pullbacks. After reaching a cycle high above 160.0 in late April, the pair corrected lower, testing the 151.85 support levels earlier this year. However, price action has since validated a significant bullish reversal pattern, suggesting potential retests of prior highs.
### Key Technical Developments:
– USD/JPY completed an inverse head-and-shoulders pattern on the 4-hour chart, breaking through neckline resistance near 156.00.
– The pair confirmed this breakout with a strong bullish follow-through, targeting the key psychological level of 160.00.
– Support areas to watch include 155.50 (former resistance zone) and 153.60 (right shoulder low).
### Technically Driven Price Action:
– The breakout from the reversal pattern and subsequent continuation shows a shift in trader sentiment, with buyers stepping in following the pullback.
– MACD indicator crossed above the signal line, offering further confirmation of bullish momentum.
– RSI is not yet overbought on the daily chart, suggesting room for upside without immediate concern of technical exhaustion.
### Fundamental Context:
– Yield differentials between 10-year US Treasuries and Japanese Government Bonds (JGBs) remain historically wide, incentivizing carry trades that support USD/JPY.
– BoJ remains reluctant to shift aggressively toward tightening due to concerns over inflation sustainability, low wage growth, and a fragile post-pandemic recovery.
– Unless verbal or actual intervention from Japanese authorities materializes, USD/JPY appears well-positioned to resume its upward trend.
## USD/CHF Technical Analysis: Breakout Confirms Bullish Reversal
While USD/CHF tends to attract less attention than other major pairs, recent developments signal a bullish reversal with potential for further gains. The pair has been recovering from sub-0.9000 levels and is now showing signs of entering a new bullish cycle.
### Key Technical Highlights:
– USD/CHF completed a “rounded bottom” pattern, a long-term reversal pattern
Explore this further here: USD/JPY trading.