USD/JPY Forecast: Trapped bulls after Fed as expected, bearish reversal likely

  • USD/JPY trapped bulls as expected as Fed announced accelerated rate hikes but kept the neutral rate unchanged.
  • The pair risks bearish reversal and could drop below 100.00 if US retail sales miss estimates.

The USD/JPY pair rose to 110.85 after Fed hiked rates by 25 basis points and surprised markets by signaling faster rate hikes.

The Fed raised its outlook for rate increases this year from three to four. Further, the central bank removed a dovish sentence from forward, which called for a need to keep rates for an extended period of time.

Still, the pair reversed course and fell back to 110.36 as anticipated and has extended losses to 110.00 neighborhood today as the Fed's decision to accelerate the pace of rate hikes, while keeping the neutral rate unchanged indicates the current policy tightening cycle is set to end sooner-than-expected.

Meanwhile, other major central banks - ECB, BOJ, and BOE are still running QE programs and yet to begin the QE taper. Simply put, there is plenty room for a sharp rally in Eurozone and Japanese bond yields, while the upside scope in treasury yields is limited.

No wonder, the PBOC refrained from raising rates in response to Fed rate hike. The Chinese central bank was expected to hike rates to keep the yield differential from widening in the CNY-negative manner.

The dollar would have picked up a strong bid if Fed would have pushed up neutral rate forecasts.

Clearly, the greenback is on a weaker footing and the USD/JPY pair risks turning bearish if US retail sales figure, due today at 12:30 GMT, prints below estimates.

Also, broad-based USD weakness is expected if ECB's Draghi says the policymakers discussed QE taper. The European central bank is expected to keep rates unchanged today, but speculation is doing the rounds that the time is ripe for Draghi to pull the plug on QE.

USD/JPY daily chart

Yesterday's candle with long upper shadow indicates the bulls fought to take the pair higher but lost as bears pushed the exchange rate back to 110.27.

The bearish follow-through seen today - drop to 110.00 - indicates the bears are now having more say in determining the exchange rate.

A bearish reversal would be confirmed if the spot closes below the 200-day MA of 110.19 today. In this case, the pair will likely resume the journey back to 108.81 (38.2 percent Fibonacci retracement of 104.63-111.40).

Only a daily close above 110.85 (previous day's high) would signal a short-term bull revival.  


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