USD/JPY Forecast: All eyes on the Fed minutes and yield curve
|Following the bullish reversal confirmation on Monday, the Dollar-Yen pair rose to a high of 110.85 yesterday. The bullish move was partly aided by a better-than-expected US retail sales release, although it is worth noting that the curve/spread between the 10-year Treasury yield and the 2-year Treasury yield remained unchanged at 91.5 basis points [bps].
Check out the yield curve chart below… we are yet to breach the descending trend line. An upside break would add credence to the bullish reversal pattern on the USD/JPY daily chart and shall open doors for a rally to 112.00 levels.
Focus on Fed minutes
Watch out for-
- Comments on inflation: Dollar rebound could gather pace if the policymakers once again blame low inflation on transitory factors
- Balance Sheet runoff: So far the talk of the balance sheet runoff has not helped the USD. However, things may change today if the minutes strongly hint at beginning the balance sheet reduction program in September. The 9-year long bull market in the stocks has been a product of QE… what’s gone up due to QE will come down once the liquidity tap runs dry. Thus, Fed’s reverse QE is a big risk to the risk assets.
- If the minutes hint at balance sheet run-off in September: The jump in the USD/JPY pair would be short lived if the equity markets turn risk-off. The JPY crosses could take a big hit as the USD is likely to remain bid against most majors except JPY and CHF.
Technicals
Daily chart
- An end of the day close today above 110.92 [38.2% Fib R of 114.49-108.71] if accompanied by a bullish break on the descending trend line on the yield curve chart could yield 111.58 [200-DMA] and 112.00 levels.
- On the downside, only a move below 109.84 [Aug 4 low] would revive the bearish trade.
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