USD/JPY Forecast: 110.00 or 113.10?

The Dollar-Yen pair clocked a high of 112.42 this Thursday morning in Asia after ending on a weaker note at 111.04 levels on Wednesday. The spot clocked a low of 110.11 earlier this week as the 10-year Treasury yield dropped to a low of 2.374%.

Rejected at 23.6% Fib retracement

The first attempt to take out 111.38 - 23.6% Fib retracement of the drop from 115.50-110.11 has failed as the spot is now trading around 111.28 levels.

US Q4 final GDP - a non-event

Preliminary GDP, which preceded Final GDP, posted a gain of 1.9% in Q1. This was short of the estimate of 2.1%. The estimate for Final GDP for Q1 stands at 2.0%. Preliminary estimate is preceded by the initial reading. Out of the three, the market responds more to the preliminary estimate. Moreover, the initial reading does give the first insight into the economic growth but almost always ends up being significantly revised higher or lower.

The final GDP reading is unlikely to have a major impact on the FX markets, unless the growth rate is significantly revised higher/lower. The American dollar is on the slippery floors; hence the downward revision of the GDP could trigger a fresh sell-off in the greenback.

More importantly, it is a better-than-expected core personal consumption expenditure that could lift the US dollar.

Focus on the Treasury yields

The 10-year yield remains around the one-month low, hence the recovery in the USD/JPY from 110.11 to 111-42 appears to be a technical correction and a potential bull trap. The Dollar is unlikely to strengthen if the treasury yield remains flat lined despite strong GDP and core PCE release later today. Weakness in the treasury yields despite strong data would only highlight the concerns about Trump delivering on the tax front.

Technicals - 110.00 appears more likely

• Pair’s rejection at 111.38 - 23.6% Fib retracement of the drop from 115.50-110.11 and 111.34 (downward sloping 4-hour 50-MA), coupled with the fact that treasury yields remain near one-month low indicates the spot is likely to break below the critical support of 111.14 and extend losses to 110.77 (Bollinger band support) and to 110.00 levels …if the GDP is revised significantly lower.
• On the higher side, only a daily close above 111.60 (Feb low and a stiff support earlier) would signal bearish invalidation and open doors for 113.10 (50-DMA).