USD/JPY Forecast: Oversold conditions may stop the US-Iranian escalation free-fall
|- USD/JPY has dropped sharply following the US killing of a top Iranian commander.
- US ISM Manufacturing PMI and the FOMC minutes are eyed.
- Friday's four-hour chart is pointing to oversold conditions.
"Truly evil" is how General David Petraeus called Iranian general Qassem Suleimani – who was killed by US drones in Baghdad. The significant US-Iranian escalation has sent traders to the safety of the Japanese yen, with USD/JPY falling to the lowest in two months.
The now-former leader of the Quds brigade spread the influence of the Islamic Republic across the Middle East and was considered No. 2 in the regime. His killing is the culmination of a rapid deterioration in relations between the world's superpower and the regional one, happening in Iraq. The attack and the market reaction – may only be the beginning.
See Suleimani killing: Three reasons a US-Iran war may break out and potential market impact.
The news is likely to continue rocking markets on Friday and also early next week, especially if Tehran retaliates. The closure of the Strait of Hormuz – where a quarter of oil production flows – cannot be ruled out.
Beyond the Middle East
The US dollar was rising before the news from Baghdad broke out. The greenback was paring back losses incurred in the dying hours of 2019. However, the move was countered by optimism about Sino-American relations as the world's largest countries were gearing up to sign the Phase One Trade Deal on January 15.
The ISM Manufacturing Purchasing Managers' Index is forecast to advance in December but remains below 50 points – reflecting ongoing contraction. Apart from providing a snapshot of the industrial sector, the report serves as the first hint toward next Friday's Non-Farm Payrolls report.
See US ISM manufacturing PMI December Preview: Waiting for improvement from China trade
Just before markets end the short trading week, the Federal Reserve releases its meeting minutes of the December rate decision. Back then, the Fed cut interest rates but signaled a long pause. The minutes may provide some clarity about the bank's intentions. Jerome Powell, Chair of the Federal Reserve, set a higher bar for raising rates than for cutting them.
See December FOMC minutes preview: Affirming neutral
Overall, the focus is now on the Middle East, with short-lived influence from other developments.
USD/JPY Technical Analysis
The Relative Strength Index on the four-hour dollar/yen chart is below 30 – indicating oversold conditions. That implies an upside correction. On the other hand, the currency pair trades below the 50, 100, and 200 Simple Moving Averages, and momentum remains negative.
Support awaits at the daily low of 107.90, which also provided support in early November. It is followed by 107.55, which capped it in the autumn. Next, the round number of 107 worked in both directions in September. Next, we found 106.45 and 105.75.
Resistance awaits at 108.20, which provided support in mid-November. The next resistance is at 108.45, which was a swing low in late December. 107.75 and 108.85 are next, before the more significant 109.20.
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