USD/JPY Forecast: Drop to 200-day moving average likely

The Dollar-Yen pair ended on a flat note on Wednesday as record highs on Wall Street negated the impact of less hawkish Fed minutes. The currency pair clocked a high of 112.52 in Asia and currently trades around 112.27 levels.

Fed minutes revealed the following:

  • Many Fed officials saw another rate hike warranted this year
  • A couple of officials expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability
  • Members agreed that, in October, the Committee would initiate the balance sheet normalization program described in the June 2017 Addendum to the Policy Normalization Principles and Plans.
  • Officials generally expected that any reaction in financial markets to the start of balance sheet normalization would likely be limited.
  • All officials agree that a gradual approach to increasing the federal funds rate will likely be warranted, although a few Fed officials wanted hikes delayed until inflation higher
  • Several Fed officials stress the need to remain data dependent
  • A few officials pointed to upside inflation risks due to tight jobs
  • Several officials noted that interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding.
  • Most officials expect tight labor market conditions to eventually push up wage price inflation

Key takeaways- Fed minutes were less hawkish than expected

  • An interest rate hike later this year is nearly a done deal, despite some divisions over where inflation is headed
  • However, division on inflation does mean the Fed could backtrack from its plan to hike rates three times in 2018 if price pressures remain subdued.
  • The minutes did not shed light on whether all policymakers agree or some dissent on the Fed's plans to hike rates three times in 2018.

The December rate hike has been priced-in, hence an upside break in the USD/JPY could be seen only if the US inflation numbers due tomorrow beat estimates.

Technical charts indicate the spot is more likely to test and possibly breach the 200-day moving average support ahead of the weekend.

Daily chart

Observations

  • Repeated failure to take out 113.00 over the last two weeks has left a rounding top pattern
  • The topping pattern has been formed around the trend line sloping downwards from the Jan 2017 high and July 11 high
  • Bearish 5-DMA and 10-DMA crossover

View

The pair is likely to test the 200-day moving average support of 111.83. An end of the day close below the same would add credence to the rounding top pattern and shall open doors for a drop to 110.70-110.50 levels.

On the higher side, only a close above 113.00 would abort the short-term bearish view on the USD/JPY.

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