USD/JPY Forecast: Fed opened doors for 115.00, 'golden cross' likely

The Dollar-Yen pair took out the 200-DMA hurdle and rose to a two-month high of 112.65 after the Fed finally made a formal announcement that it would begin normalizing the balance sheet in October and the median dot plot continued to project one more rate hike this year, followed by three more increases in 2018.

Key takeaways

• Fed wants to normalize the balance sheet as fast as possible

During the press conference, Yellen said the Fed would continue to unwind the balance sheet and would use interest rates to counter potential slowdown/shocks in the near future. What it means is that the Fed would go back to expanding its balance sheet only if the interest rates hit the zero lower bound again. Clearly, the central bank wants to unwind the balance sheet as fast as possible.

• Fed likely to raise rates in Dec and deliver three rate hikes in 2018

Markets have yet to price in the odds of three rate hikes in 2018. As noted above, unwinding the balance sheet is a priority, thus interest rates will be the preferred tool to counter the slowdown. Thus, it is rational on the part of the Fed to push rates as high as it could without destabilizing markets. If the Trump tax plan comes through and China PPI remains healthy, the Fed could indeed deliver 3 or even 4 rate hikes in 2018.

• Low inflation is due to transitory factors

Yellen said the weak inflation is due to factors that are not directly related to the economy and are transitory in nature. The central bank Chief also said that the negative impact of hurricane Irma and Harvey will be short-lived and will not damage the economy in the long-run.

US-Japan 10-year yield spread chart shows a bullish breakout

• The chart above shows a bullish falling channel breakout. It indicates the spread is likely to widen further in favor of the USD in the near future.

Technicals - Pullbacks are likely to be short-lived, Eyes 115.00

Daily chart

Weekly chart

Resistance

• 112.80 [76.4% Fib R of 114.49-107.32]
• 114.49 [July high]
• 115.50 [March high]

Support

• 111.66 [weekly 200-MA]
• 110.35 [50-DMA]
• 110.00 [zero levels]

Observations

• Overbought Stochastic [5,3,3]
• 14-day RSI bullish
• Potential golden cross on the weekly chart [50-MA & 200-MA bullish crossover]
• 5-DMA and 10-DMA are sloping upwards

View

A minor pullback cannot be ruled out, although the broader outlook remains bullish. Dips to 10-DMA (upward sloping) are likely to be met with fresh bids. The spot price looks set to test 115.00 as discussed earlier this week.