USD/JPY Forecast: Drop to 111.80 likely, US 10-yr T yield nears key hurdle

The American Dollar was offered across the board in Asia as markets priced in the even odds of a neck-to-neck race between Powell and Warsh as candidates for next year's Fed Chair position. The Dollar-Yen pair dropped to a low of 112.41 after failing multiple times to close above 113.00 levels.

Jerome Powell brings deep Wall Street roots to the job from his tenure as a partner at the Carlyle Group from 1997 to 2005. He also is a current voting member of the policymaking Federal Open Market Committee. Powell is less hawkish than Warsh and favors reducing bank regulation. Hence, a significant majority in the market believes Powell is more suitable for the job under Trump Presidency.

Focus on US ISM non-manufacturing and Yellen speech

The US ISM non-manufacturing PMI, due at 14.00GMT, is expected to show the pace of expansion in activity improved slightly to 55.5 in September from the previous month's print of 55.3. A better-than-expected ISM non-manufacturing print could improve the odds of a strong NFP data due on Friday.

Meanwhile, Fed President Yellen is likely to repeat last week's comments that “it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent" and that the central bank "should be wary of moving too, gradually". The USD may regain bid tone if the ISM non-manufacturing beats estimates and President Yellen sounds hawkish.

Technicals

Daily chart

• Repeated failure to close above the 113.00 handle has opened doors for a pullback to the weekly 200-MA support seen at 111.80 levels.
• An end of the day close below 112.21 [Sep 29 low] would signal some potential for a deeper pullback to 111.44 [200-DMA].
• On the higher side, a daily close above 113.25 [Sep 27 high] would revive the bullish move and shall open up upside towards the 115.00 handle.

US 10-year yield needs to break above 2.4%

• A convincing break above 2.4% would put an end to a series of lower highs seen on the weekly chart. Such a move looks likely as indicated by the bullish engulfing pattern on the monthly chart.
• A move above 2.4% coupled with an end of the day close in the USD/JPY pair above 113.25 would signal some potential for a more sustained rally to 115.00 levels.