USD/JPY Forecast: Powell's power put to test after the pair emerges from oversold conditions

Recovering with US yields after the meeting minutes

The FOMC Meeting Minutes pointed to optimism among Fed members that see a robust economy and inflation eventually picking up. Expectations for a quicker path of rate hikes sent the dollar higher alongside US Treasury yields. Several bond auctions resulted in higher yields also in the primary market, strengthening the trend. 

Fed members repeated their messages with the hawks remaining hawkish and the doves remaining dovish, providing no surprises. The few economic indicators that were released in the US were also upbeat: Markit's PMIs and also jobless claims exceeded expectations. 

In Japan, inflation came out slightly higher than expected: the National Consumer Price Index stood at 1.4% YoY in January. However, core inflation remained unchanged at 0.9%. We heard some mild comments from Japan's Ministry of Finance about the yen, talking about one-sided moves but they had little affect on the USD/JPY. 

Powell's first testimony, GDP, Core PCE and lots more

The end of February and the beginning of March feature top tier events. The action begins with New Home Sales on Monday, and they are expected to continue rising. Durable goods orders come on Tuesday and provide guidance on investment, a long-term indicator that the Fed eyes.

Fed Chair Jerome Powell will testify in Capitol Hill for the first time. The prepared statement, due already at 13:30 GMT and the consequent testimony and  Q&A session (from 15:00 GMT) will be closely watched. Markets know relatively little of Powell's monetary policy stance as he hasn't voiced it too often and always voted with the majority. Does Powell sees inflation rising fast? Or is is a wait and see mode? How many hikes can we expect? Is economic growth accelerating?

The Fed Chair will probably refrain from giving straight asnwers, and markets will scrutinize every word he says. Powell makes a second appearance later on, but the event on Tuesday will probably have a greater impact. 

The second release of GDP comes on Wednesday with an expected minor downgrade from 2.6% to 2.5%. Thursday features quite a few other top-tier data. The Core PCE Price Index, the Fed's favorite measure of inflation, is expected to remain unchanged at 1.5% in January, significantly short of the 2% inflation target. Any deviation will probably cause a stir.

On Thursday we will also get the weekly jobless claims that neared a 45-year low and the ISM Manufacturing PMI, the first hint towards the Non-Farm Payrolls next week. On Friday, no US figures are planned, allowing time to digest the data.Here are the top US events as they appear on the forex calendar: 

Japanese unemployment rate, bond jitters

The unemployment rate in Japan is expected to drop to 2.7% from 2.8%, reflecting the strong growth in the country. As usual, Japanese events hardly move the yen, but broader markets do.

The pair will likely continue following the US bond yields, most notably the 10-year Treasuries. If the yield passes the round number of 3%, the upside move may be outsized, as the level is eyed by many. Stock markets also remain correlated, but in order for them to drive the yen higher, a significant fall is needed. 

Here are the events lined up in Japan: 

USD/JPY Technical Analysis: Still looking heavy

The USD/JPY rose from the abyss of ¥105.55, the 15-month low. It reached oversold positions and with the recent rise, this condition has ended. Nevertheless, the RSI still remains below 50 points and Momentum remains unequivocally to the downside. The downtrend is also easy to see on the daily chart.

The lines to watch are the round level of ¥106.00: the pair did not trade below this level for too long. The ¥105.55 mentioned before is the next line and remains the last barrier before ¥105.00 a level that might trigger further verbal intervention. 

Looking up, the September 2017 low of ¥107.30 is still relevant and it is followed by ¥107.90 that was seen earlier this week. 

Here is the daily chart.

What's next for USD/JPY?

The pair may continue falling, as Powell may not seek to alarm the markets with an acceleration in raising rates. The technical levels also point to the downside. However, the move may be limited.

Examining the FXStreet FX Poll shows a bearish sentiment in the near term, similar to the sentiment expressed here.