USD/JPY rallies to three-year highs above 114.00 amid risk-on market sentiment

• USD/JPY soars during the week, despite US dollar weakness across the board.
• Rising US T-bond yields underpins the USD/JPY pair.
• US Retail Sales upwardly surprised, rose by 0.7%, more than expectations.

The USD/JPY extends its one-and-a-half month rally, advances 0.47% during the New York session, trading at 114.21 at the time of writing. As portrayed by US equity indexes rising between 0.46% and 1.12%, positive market sentiment in the financial markets weighs on the Japanese yen.

Additionally, the US T-bond yields, which correlate positively with the USD/JPY pair, are climbing. The 10-year US Treasury yield is up to six basis points, sitting at 1.577%, boosts the greenback against the yen.

Meanwhile, upbeat US macroeconomic data lend a hand to the greenback. Surprisingly, US Retail Sales for September rose by 0.7%, higher than the 0.2% contraction foreseen by economists. Excluding autos and gas, sales expanded by 0.7%, better than the 0.5% in the previous month.

Furthermore, the University of Michigan Consumer Sentiment Index reading was 71.4, worse than the 72.8 estimated by investors, the second-lowest reading since 2011, as consumers grew more concerned about current conditions and the economic outlook.

USD/JPY Price Forecast: Technical outlook

The USD/JPY had witnessed a 400 pip rally since October 4, when it was trading around 110.50. The Relative Strenght Index (RSI) at 75, depicts that the upward move is overextended, as the RSI showed oversold conditions since October 11. On that same day, the 50-day moving average (DMA) crossed over the 100-DMA, giving a boost to the pair, as the correct order for moving averages in an uptrend is the shorter-time frames moving average, over the longer time frame ones. 

That said, the USD/JPY first resistance level is October 4, 2018,  high at 114.54, which is a crucial price level, unsuccessfully tested four times in four years. A break above the latter can clear the way for further gains, exposing key resistance levels like January 27, 2017, high at 115.37, followed by January 9, 2017, high at 117.52.

On the other hand, failure at 114.00 could open the door for a leg-down in confluence with the current RSI oversold conditions. The first of the critical support levels to be tested would be the October 13 high at 113.79, followed by the October 12 low at 112.99, and then the October 8 high at 112.24.

KEY ADDITIONAL LEVELS TO WATCH