USD/JPY Forecast: 50-DMA could be put to test as T-yields rise on hawkish Yellen

The Dollar-Yen pair found support at the confluence of the 5-DMA and the descending trend line support on Tuesday and jumped to a high of 114.50 after Yellen’s hawkish comments pushed the US 10-yr Treasury yield to near 2.5%.

Jump in March Fed rate hike bets is unsustainable

"Precisely when we would take an action, whether it is March, or May or June... I can't tell you which meeting it would be," Yellen said in response to a question. "I would say that every meeting is live."

Though Yellen did not rule out a rate hike in March, most economists still think the next one will occur in June… as uncertainty over the fiscal policy is here to stay for at least another few months.

Thus, the jump in the March rate hike probability from 30% to 38% appears unsustainable.  

Yellen reiterated that “waiting too long to remove accommodation would be unwise, potentially requiring the (Fed) to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession." Markets have heard these lines before; hence once again the jump in the March Fed rate hike bets looks unsustainable.

Key takeaway - Yellen in favor of easing regulation for smaller banks

Yellen defended the Dodd-Frank Act and rejected the idea that it has made US lenders less competitive. She said the banks are in far better shape than European rivals. However, she did say that the Fed has been trying to ease the regulatory burden on community banks and is open to doing more.

Her partial support could make it easier for the Trump administration to present a ‘watered down’ version of the Dodd-Frank. Less regulation and higher lending would be positive for the US economy/US dollar in the short-run.

Treasury yields need to break above the recent highs

The 10-yr yield rose from 2.44% to near 2.5%. That is positive for the US dollar; however, one must not forget that the yield has repeatedly failed to hold on to gains above 2.5% throughout late December and January.

Hence, only a sustained break above 2.5%/consecutive daily close above 2.5% could yield a convincing break in the USD/JPY pair above 50-DMA level of 115.00.

Technicals - Eyes 50-DMA

Daily chart

• Pair’s rebound from the confluence of the rising trend line and 5-DMA on Tuesday followed by a highest daily close (114.26) in two weeks, coupled with the break in the RSI above 50.00 and bullish crossover on the DMI suggests the spot is likely to extend gains today to 50-DMA seen at 115.00 levels.
• The only factor that warrants caution is the ADX line, which is still sloping downwards - indication of a weak trend.
• On the downside, a daily close below 113.00 (confluence of 10-DMA and descending trend line) would signal the rally from the recent low of 111.61 has ended and the spot could revisit 112.00-11.61 levels over the next few days.

Bullish scenario: Two consecutive daily close in the US 10-yr treasury yield above 2.5% would open doors for a rally in the USD/JPY pair to the recent high of 118.66 levels.

AUD/USD Forecast: Awaits range breakout

4-hour chart

• A break to the upside would signal continuation of the rally from the December 23 low of 0.7160. The measured height method suggests a bullish break would open the doors to 0.7550 levels.
• However, caution is advised here as the daily RSI is losing height… turning lower from the overbought territory and the ADX line appear to have topped out as well.
• The indicators suggest a downside break from the range, in which case support at 0.7550-0.7511 could be put to test.