USD/JPY Forecast: Suffers the worst of all worlds following the Fed

USD/JPY is trading below 112, the lowest since late October.
The Fed decision proved to be a dual issue for the pair.
The technical picture shows oversold conditions.

Yohay Elam FXStreet

USD/JPY is trading around 111.70, levels last seen on October 26th. The Federal Reserve raised rates on Wednesday, as widely expected. More importantly, the downgraded the projections for rate increases in 2019 from three to two hikes. Bond markets expected a slash of the outlook to a single hike.

Alongside the pledge to raise rates and the ongoing description of risks as "roughly balanced," the move was initially perceived as a "hawkish hike." The US Dollar advanced against its peers, and stock markets tumbled down, especially as the Fed continues with reducing its balance sheet.

USD/JPY did not go too far: while a hawkish Fed supports the Dollar, the safe-haven yen sees demand when shares fall.

After dollar/yen could not enjoy the USD gains, it tumbled down when markets had second thoughts about the Fed on Thursday. The downgrade of the dot-plot is now seen as dovish move, albeit a small one. The American currency is falling across the board and also against the Japanese Yen. This sell-off happens despite the ongoing struggle of equity markets.

All in all, USD/JPY suffers from both a weaker USD and safe-haven demands for the JPY. A one-two punch.

Apart from further thoughts about the Fed, the US releases the Philly Fed Manufacturing Index for December and weekly jobless claims. The data may return to dominate on Friday with the release of final GDP, Durable Goods Orders, and other figures.

USD/JPY Technical Analysis

The Relative Strength Index (RSI) dropped below 30, indicating oversold conditions. The pair fell too far, too fast, according to the indicator. Dollar/yen is well below the 50 and 200 Simple Moving Averages, indicating a bearish trend, but we may see a bounce before the next fall.

111.70 provided support back in October and also in September and is still fought over. 111.34 was a swing low in late October and critical support. 111.10 was a stepping stone on the way up in September. 110.40 was the low point that month.

112.20 served as a triple bottom up to the fresh downfall and now turns into resistance. 112.60 was a peak just before the recent fall. 113.15 provided support to the pair earlier this month.

More: USD/JPY faces an uphill battle to recover – Confluence Detector

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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