USD/JPY Forecast: Trapped in a narrowing price range

• USD/JPY scaled the 200-day MA hurdle on Wednesday but is still trapped inside a narrowing price range defined by the confluence of rising trendline and 50-day moving average (MA) and falling trendline. 
• Conflicting signals: yield differential favors the USD bears, but technical charts indicate the pair could attack recent high of 111.40. 

USD/JPY closed above the 200-day moving average (MA) yesterday, having defended the confluence of rising trendline support and the upward sloping (bull biased) 50-day MA in Asia.

The close above 200-day Ma, though encouraging, could be short-lived as the yield differential narrowed in the USD-negative manner. The spread between the US 10-year treasury yield and 10-year Japanese Government Bond (JGB) yield fell more than five basis points yesterday to 279 basis points - the lowest level since May 31.

Further, the yield differential is creating a head-and-shoulders bearish reversal pattern, as discussed yesterday.

So, the pair may have a tough time building on a break above the 200-day MA and may find acceptance below the confluence of rising trendline and bullish 50-day MA if the yield spread drops below 275 basis points, confirming a head-and-shoulders breakdown.

While the yield differential favors the bears, the technical charts offer little bias.

Daily chart

The pair lacks clear direction as indicated by the sideways movement in the Bollinger Bands (+2,-2 standard deviation on the 20-day moving average).

Also, the pair is trapped in a range defined by a rising trendline (drawn from the March 26 low and  My 29 low) and the falling trendline (drawn from the May 21 high and June 15 high).

However, Chaikin Money Flow has jumped to 27.90 (highest level since January), indicating a strong buying pressure. This only adds credence to the USD's solid defense of the confluence of rising trendline and bullish 50-day MA and indicates the pair will likely clear the resistance of falling trendline (drawn from May 21 high and June 15 high), currently located at 110.67, and test supply around the recent high of 111.40.

That said, only a monthly close above the long-term falling trendline (drawn from August 2015 high and December 2015 high) would confirm a bearish-to-bullish trend change. Currently, the trend line resistance is located just above 111.00.

On the downside, a daily close below the confluence of rising trendline and 50-day MA of 109.73 would shift risk in favor of a drop to 108.81 (38.2 percent Fibonacci retracement of March 26 low - May 21 high).

Note: The dollar is on a tear against gold (hard currency with a limited supply) despite trade war fears. So, JPY and other paper currencies have little chance to score substantial gains against the greenback.

A turnaround in gold could be considered an indication the USD/JPY is heading lower.