USD/JPY forming a bull flag on daily chart, with all eyes on BOJ

• USD/JPY is on the back foot amid USD retreat, upbeat Japanese data.
• Improving mood is aiding the recovery in the pair ahead of US data.
• Bull flag is in the making on the daily sticks, with Thursday’s BOJ awaited.

Having failed to find acceptance above 129.00 in the previous week, USD/JPY sellers have regained control, as the downside extends into the second straight day this Tuesday.

The latest decline in the pair could be attributed to the broad-based retreat in the US dollar while Monday’s risk-aversion also kept the safe-haven demand for the yen underpinned.

Over the last hour, however, the market mood is seen improving, adding further to the dollar while helping ease the buying pressure around the yen. At the time of writing, USD/JPY is trimming losses to trade at 127.80, still down 0.24% on the day.

The major reached five-day lows of 127.34 in early Asia after the yen received a fresh boost from the Japanese labor market report, which showed that the country’s jobless rate fell to 2.6% in March, while the availability of jobs increased, per the government data.

All eyes now turn towards the US Durable Goods data due for release later on Tuesday while Thursday’s Bank of Japan (BOJ) policy decision and US Q1 Advance GDP will be the main event risks for the major this week.

Technically, USD/JPY’s daily chart shows that the price is carving out a bull flag formation, in the face of the recent consolidation that followed a vertical rise from March 31.

The BOJ decision could validate the bull flag if the yen slump on a dovish stance reassured by the central bank this Thursday.

A sustained move above 128.70 will confirm the bullish continuation pattern, opening doors towards the 20-year highs of 129.40 once again.

The 14-day Relative Strength Index (RSI) has moved away from extremely overbought territory, offering some hopes for bulls to re-enter.

USD/JPY: Daily chart

In case of a hawkish pivot from the BOJ or strong verbal intervention, USD/JPY could breach the falling trendline support at 126.70.

Daily closing below the latter will invalidate the bullish formation, prompting bears to resume the correction towards the bullish 21-Daily Moving Average (DMA) at 125.35.

USD/JPY: Additional levels to consider