USD/JPY: Fed put in play, risk takers back in the driver's seat

• USD/JPY has erased the majority of the Fed's sell-off.
• USD/JPY is currently trading at 109.52, up from a low of 109.43 and a touch below the session high of 109.59.

USD/JPY benefited from the jump in US yields on Friday following the NFP report that sent the pair rallying from 108.90 to almost 109.60 after the jobs data. The yen is now licking its wounds, regarded as the worst performer in the G10s as Sino/US relations look to be back on track towards a trade deal and US stocks cheer the Fed sentiment and bullish US data. 

US payrolls came out a very impressive 304k in January. This was much higher than the expectations of +165k. - Despite the partial government shutdown. Had it not been for the unemployment number, this report may have been considered even strong. However, what must be noted is the participation rate was strong. Also, the US government shutdown meant that while furloughed government workers had no direct impact on the payrolls survey because they received back-pay, they did show up as temporary layoffs in the separate household survey used to calculate the unemployment rate, as analysts at Westpac Banking Corporation pointed out. "That rate ticked +0.1ppts higher to 4.0%, due mainly to the shutdown." 

However, the analysts also note that "the prior two months saw a hefty 130k in downward revisions, taking away from some of January’s upside surprise, while average hourly earnings saw a muted 0.1% gain, leaving the annual rate at 3.2%."

The Fed put in play and dollar sell-off overdone?

Concerning yields, the US 10yr treasury yield rebounded off a one-month low of 2.62% to 2.69% while the 2yr yields climbed from 2.46% to 2.52%.  There are no Fed hikes priced in for the foreseeable future and Futures markets have reduced the chance of a rate cut in December from 20% to 10%. However, with the RBA and BoE coming up this week, taking into account the Fed's neutral tone, rate cut sentiment could be a factor at the RBA. The BoE is stuck between rock and a hard place due to Brexit, therefore potentially neutralising some of the bearish sentiment to the dollar and supporting the Fed put theory which supports a bullish outlook for US stocks and risk.

USD/JPY levels

• Support levels: 109.05 108.65 108.30  
• Resistance levels: 109.60 110.00 110.40

Valeria Bednarik, Chief Analyst at FXStreet, explained that the pair returned to its comfort zone previous to the FOMC's dovish announcement, above the 109.05 Fibonacci level, the 61.8% retracement of its latest daily slump:

"In the daily chart, the 100 DMA extends its decline above the 200 DMA, nearing the larger one, both around 111.50, maintaining the longer-term perspective skewed to the downside. Technical indicators in the mentioned chart head marginally higher within neutral levels, falling short of confirming additional gains ahead. In the 4 hours chart, the intraday advance Friday stalled around the 200 SMA, the immediate resistance at 109.60, while technical indicators lost upward strength, the Momentum right below its mid-line and the RSI at 59, in line with the longer-term perspective."