USDJPY Posts Massive Head and Shoulders Pattern

USDJPY Posts Massive Head and Shoulders Pattern
The downbeat mood in the markets persisted on Thursday, dragging down the USDJPY 0.4% lower ahead of the US session, likely leading to a retest of the critical support at 127.00.

Bears on rampage

On Wednesday, US equities sank after a string of poor quarterly reports from big retailers Target, Walmart, and TJX Companies damaging already battered market confidence. All three corporations expressed concern about the status of the American consumer and rising inflation.

"We never expected the kind of cost increases in freight and transportation that we're seeing right now," Target chairman and CEO Brian Cornell told Yahoo Finance.

Markets are increasingly concerned that a more aggressive approach by major central banks to curb inflation might stifle global growth. Furthermore, China's COVID-19 lockdowns and the Russia-Ukraine conflict have fueled recession worries.

Bearish sentiment in stocks hit the usual risk barometer in the FX market - USDJPY - which plunged more than 100 pips, and it looks like it will cancel the long-term uptrend very soon.

USDJPY forms a reversal structure

The USDJPY pair has now formed a perfect head and shoulders pattern, in this case, a bearish reversal formation. The neckline of this pattern, thus the key support, lies at 127.00 (the red horizontal line). 

The formation might become confirmed and valid if the USD drops below that level. The full potential is circa 400 pips. Thus, bears could be targeting the 123.00 level in the medium term. 

On the other hand, should the greenback catch some bids, it must jump above 129 to improve the short-term trend to bullish.

In terms of economic news, the weekly initial jobless claims report is predicted to indicate ongoing labor market improvement. At the same time, the Philadelphia Fed manufacturing index for May is expected to show a decline in the sector.
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