USD/JPY Forecast: Eyes re-test of 112.80, focus on Powell testimony

USD/JPY looks set to re-test recent high of 112.80 and could extend gains further towards 113. 30 (200-week MA) if Fed’s Powell downplays the impact of trade tensions on the economy.

At press time, the currency pair is trading at 112.44, having clocked a low of 112.23 earlier today. 

Focus  on Powells’ testimony before congress

Fed’s Powell’s testimony will shed light on whether the central bank would slow the pace of rate rises amid growing risks. 

It is worth noting that a September rate hike is already locked-in. For instance, market is attaching 85 percent probability that rates will be hiked to 2.00-2.25 percent in September. 

Meanwhile, the probability of a December rate hike currently stands at 53 percent and could rise sharply, pushing the USD higher across the board if the Fed’s Powell expresses concerns regarding rising inflation and and shrugs off/downplays the negative impact of trade tensions with China and other countries. Moreover, it would signal markets that Fed’s primary focus is on controlling inflation and hence the central bank stands ready to revise higher even the neutral rate forecast. 

In this case, USD/JPY is seen rising to 113.24 (200-week MA). Further gains are ruled out for now, courtesy of short-term overbought conditions. On the other hand, USD/JPY risks falling back to its 10-day MA, currently located at 11.51, if Powell sounds more cautious as regards further rate hikes. 

For now, the hourly chart favors a re-test of the recent high of 112.80.

Hourly chart

The descending triangle breakout -  a bullish continuation pattern, indicates the pullback from the recent high oil 112.80 has ended and the pair could soon revisit that level. The relative strength index is biased toward the bulls.

Daily chart

RSI and Stochastic are calling for a pullback in USD/JPY. So, a re-test of 111.40 (previous high) could be on the cards, although the overall bias would still remain bullish as indicated by the upward sloping band of Fibonacci EMA.