USD/JPY Forecast: Bearish lean, eyes Fed minutes

The Dollar-Yen pair dropped to a low of 111.99 yesterday as the bid tone around the USD weakened on fears that Trump's tax reform plan could be hitting a major speed bump. However, by day's end, the pair had recovered to 112.44.

The uptick in EUR/JPY on the easing of Catalan fears seems to have lifted the Dollar-Yen pair from the low of 111.99. Catalan leader Carles Puigdemont suspended the results of the referendum and opened doors for talks with Madrid government. 

Prepping for a breakdown?

Rise in Inflation expectations has stalled

Fed's Kaplan was on the wires in the Asian session today, stating that the Fed would want to see more evidence of progress in inflation for further (3 rate hikes in 2018) rate hikes.

There is evidence of a slowdown in inflation expectations. For example - The 5 year, 5 years, forward inflation expectation rate currently stands at 1.96; well below the recent high of 2.03. The inflation expectations chart seen below shows the recovery from the June low of 1.78 has run out of steam. This is bad news for the USD bulls.

US 10-yr yield remains below 2.4%

The rally in the US 10-year yield from 2.016% (Sep 8 low) appears to have run out of steam at the critical resistance of 2.4%. The first attempt to take out 2.4% on Oct 6 failed. Since then, the yield has struggled to near 2.4%.

Dec rate hike priced-in to a large extent

The probability of the December rate hike stands at 91%. Over the last one month, the USD index has strengthened from 91.99 to 94.10, which suggests the markets have priced in the December move to a large extent.

Technical exhaustion

The repeated rejection at 113.00 levels has left a nice rounding top pattern on the daily chart.

Daily chart

• The spot looks set to test 111.84 (the 200-DMA) and possibly extend losses to 111.47-111.00 levels.
• On the higher side, only two consecutive day's end closes above 113.00 would revive the rally from the September 8 low of 107.32 and shall open doors for 115.00

Will the Fed minutes lift the USD/JPY pair above 113.00?

The 10-year treasury yield could break above 2.4%, pushing the USD/JPY beyond the 113.00 hurdle if-

• The minutes show strong backing for three rate hikes in 2018

As noted earlier, the December rate hike has been priced in to a large extent. Thus, only strong backing for three rate hikes in 2018 could yield two consecutive day's end closes above 113.00 levels.