USD/JPY headed to 109 or below on a dovish Fed hike scenario?

  • USD/JPY headed to 109 handle?
  • USD/JPY downside opened up on the tax plan delays news.
  • Watch out for a dovish Fed hike.

USD/JPY has made fresh lows for the session on the back of the news that indeed the corporate tax cuts that the GOP intends to apply will be delayed until 2019. The move in the yen takes it down to an 8-day low, en route for a break of the 113 handle and to match or exceed the 31st October lows. 

Senate tax bill to delay corporate tax cut until 2019, dollar to deflate?

Where does USD/JPY head next on this news?

The DXY is now down 0.41% and US 10 year yields are down -0.52%. One can't help but imagine that the same technical picture will emerge as we have seen that each time the yen dropped above 114, supply emerged and took the pair back as far as into territory on the 109 handle. There was a great deal of the Trump trade priced into the dollar on the back of a more immediate tax relief programme. Trump's insistence and bullish rallying implied that immediate changes were necessary to spur the economy, something that the market had bought into. If markets were not already cautious over Trump's rhetoric, then we might see a more Fabian approach to the bid from here on and a fade on rallies could be the gameplay, at least while there is a void of Fed optimism ahead of the Dec meeting where rates are expecting to be lifted. Although, what would a dovish hike mean to the dollar?

USD/JPY levels

USD/JPY failed at the top of the recent range 114.38/58, (May and July highs and the 2015-2017 downtrend), and is currently pressured towards 31st Oct lows at 

112.95. The near-term risk is for a deeper retracement to 112.03/111.75 (the 200-day ma and the 55-week ma), according to analysts at Commerzbank.  "Ideally this will hold, while above here an upside bias will persist. A close above 114.58 will introduce scope to the 118.60/66 January high. Where are we wrong? The 55-day ma guards the 109.55 mid-September low and in turn this support guards the 108.81/13 April and June lows as well as the September low at 107.32," the analysts argue.

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