U.S. Dollar Strategy Planning With EUR/USD And USD/JPY

The remainder of this week will be pivotal for near-term price action in the U.S. Dollar. Tomorrow brings us the Federal Reserve’s rate decision for the month of May, and on Friday we get Non-Farm Payrolls for the month of April. Each of these drivers can produce impact on the U.S. Dollar, and given the Greenback’s bifurcated run of recent, showing weakness against the British Pound and the Euro while showing strength against the Japanese Yen, and traders may have some interesting opportunities for trading swings into new trends over the next couple of days. Below, we look at a bullish and a bearish scenario around the Greenback as we trade into the latter portion of this week.

Long USD/JPY – Optimal for Bullish–USD Scenarios

One of the more pervasive moves in the FX-world over the past couple of weeks has been a re-ignition of Yen weakness. And for FX traders, this is likely a welcome occurrence as trading Yen weakness has become an attractive theme for trend, momentum and swing traders since the election of Shinzo Abe in Q4 of 2012. But it hasn’t been all smooth sailing for the Yen since 2012, as numerous periods of risk aversion have seen the Yen re-strengthen, tempering gains in pairs like USD/JPY, EUR/JPY and GBP/JPY.

After the U.S. Presidential election ushered in the ‘reflation trade’, the Yen caught a significant run of weakness as the risk trade went ballistic. Stock prices around-the-world jumped-higher, and the world’s favored funding currency (the Yen) put in a significant bout of six weeks’ worth of weakness. After trading below 102.00 on the night of the election, USD/JPY had jumped to as high as 118.60 just six weeks later, right before the Federal Reserve hiked rates in December.

But since that December rate hike, matters haven’t really been the same. USD/JPY set that high at 118.60 and that level was re-tested just a couple of weeks later, shortly after the open of the New Year. But after that, weakness took over as the pair spent much of the next four months channeling lower; wiping away approximately ~60% of that prior election-inspired move.