USD/JPY Forecast: Technical correction likely, Trump’s failure on health care is "glass half full or half empty scenario”

The Dollar-Yen pair dropped to a low of 110.11 on Monday as Trump’s failure to repeal and replace Obamacare forced investors to question the Trump’s ability to deliver the massive tax cuts (question trump trade) and that led to a move out of the risk assets - equities, industrial metals and into the traditional safe havens and funding currencies - gold, treasuries and the Japanese Yen.

“Glass half full or half empty scenario”

Experts say Obamacare had its own weak points, however, Trumpcare was worst. So in a way, failure to repeal Obamacare could be positive news. But the biggest positive news that comes through from the whole health care affair is that there are checks and balance in Washington… and hence, I am no longer worried about a trade war between China and US.

The glass half empty part of the scenario is - Failure to repeal Obamacare means Trump has less scope to deliver ‘massive’ tax cuts. The budget constraints in the US are such that spending needs to have inflow in the form of savings… which would have happened if Obamacare was replaced by Trumpcare. This does not mean there wouldn’t be any tax cuts, however, the actual plan could be a watered down version of the ‘massive’ cuts Trump has talked about for so long.

What it means for the market?

The risk-off seen on Monday may have been slightly exaggerated. Risk assets and the US dollar could recover, although this time market is likely to be more cautious, thus gains would be slow. Hence, it would be tough task for equities and US dollar to re-test the recent highs.

Focus on Yellen

The Dollar-Yen pair could dip below 110.00 levels if Yellen expresses concerns regarding Washington’s ability to initiate tax cuts and fiscal spending program.

Technicals - Bullish divergence on the 4-hour chart

Key levels to watch out for -

• 110.12 (weekly 200-MA) – 110.10 (0.764 fib expansion of Dec high-Feb low-Mar high)
• 109.13 (38.2% fib retracement of 125.856-98.79)
• 111.38 (23.6% fib of 115.49-110.11)
• 111.60 (Feb low)
• 112.16 (38.2% fib of 115.49-110.11)
• 112.67 (5-DMA)

Pair’s sharp recovery from the low of 110.11 coupled with the bullish price RSI divergence on the 4-hour chart suggests the pair may have found a temporary bottom at 110.11 and the technical recovery could take the pair higher to 111.38 (23.6% fib of 115.49-110.11).

On the downside, a break below 110.00 levels could trigger stops on the positional longs and yield a quick fire sell-off to 109.50  and possibly to 109.13 (38.2% fib retracement of 125.856-98.79).