USD/JPY Forecast: Health Care bill, Trump’s leadership test & a potential bear trap

The Dollar-Yen pair fell to a low of 110.73 on Wednesday before staging a partial recovery to 111.16 levels. The recovery has been extended further in the Asian session to 111.58 levels.

Markets on pause ahead of the health care vote

The health care vote in itself is not in any way associated with “Trump Bump’. However, Trump is making markets and America wait… again and…again when it comes to disclosing the details of his fiscal/infrastructure spending plan. Consequently, Trump’s ability to come true to his campaign promises is silently being questioned.

Thus, the health care vote is seen as Trump’s first major test of Trump’s legislative ability and the result would act as an advance indicator of whether he would be able to deliver on his campaign promises - Huge tax cuts and fiscal spending.

If the bill is rejected, risk aversion could worsen, taking the USD/JPY pair down to 110.00 levels. On the other hand, a relief rally for the risk assets and the USD/JPY could be in the offing if the health care bill is passed.

Dow fell for a fifth straight session yesterday, but the broader market staged a modest rebound as technology stocks strengthened. The index ended flat, which suggests the market is on a wait and watch mode. That also helped the USD/JPY pair recover to 111.58.

Technicals - Bearish breakdown confirmed

Daily chart

• A bearish break from the sideways expanding channel on Tuesday, followed by a daily close below the critical support of 111.60 and below the lower Bollinger band on Wednesday, coupled with the downward sloping 50-DMA suggests the doors have been opened for a sell-off to 110.00 levels.
• The daily RSI is yet to hit the oversold territory, which supports the bearish case. Failure to hold above 111.14 (0.618% Fib extension level) would add further credence to the bearish view.
• Also worth noting is that the 50% Fib retracement of the Trump rally is located at 109.93 levels.
• The spot could revisit 111.60 - 112.00 levels if the health care bill is passed, however, the outlook remains bearish as long as the spot is below 112.60 (Jan 17 low).