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Talking Points:

  • The fundamental landscape for the Dollar has shifted after dovish comments from multiple Federal Reserve officials, Dollar strength may fade
  • March trend-line support has been tested and has failed in recent weeks, which suggests its strength and relevance is waning
  • Short position will be entered upon re-test of 2018 highs at 114.5 or failed test of 23.60% Fibonacci level at 114

USD/JPY Fundamental Landscape Shifts after Fed Comments

USD/JPY continues to trade near the high for 2018, despite a bearish shift in the fundamental backdrop for the pair. In the past two weeks, dovish comments from Fed officials Powell, Clarida and Bostic have weighed on rate hike expectations and could suggest the hawkish nature of the Fed has reached its peak.

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The Fed’s hawkishness has long been priced into the pair and has acted as a lingering tailwind for the Dollar. Given the recent shift in commentary from Fed officials, that tailwind may weaken, and a broader market reevaluation of the pair could take place. This presents an intriguing short set-up.

USD/JPY Price Chart Daily, July 2016 – November 2018 (Chart 1)

USDJPY Price chart long-term

With the pair near 113.80, upside potential appears limited with the 2018 high around 114.50 and 23.60% Fibonacci resistance at the psychological 114 level. The pair has followed the trend-line higher from March but has repeatedly tested and broken below in recent weeks. Coupled with a series of lower highs, the technical landscape suggests bulls may be tired and a re-test of 114.50 seems unlikely.

USD/JPY Price Chart 4-Hour, June 2018 – November 2018 (Chart 2)

USDJPY price chart trade idea

With that in mind, I will look to enter my short position in the 114 region with a stop at 114.60 which would mark a fresh high for 2018. At this time, 112 is targeted but updates and subsequent reevaluations of the trade set-up may see that change.

Potential Risks

The foundation for a short has been laid but risks remain. Fed comments, particularly from Chairman Powell could derail the short-term outlook for the pair. However, on a longer-term basis I expect commentary to continue to move away from the ultra-hawkish stance.

Check out our economic calendar for upcoming events this week that range from US GDP data to speeches from Fed Chairman Jerome Powell.

Another risk is the implementation of auto tariffs on Japan by the United States. This would be a substantial development in the ongoing trade wars and would likely have a period of posturing and debating before pursued. Any news of a trade war escalation between the United States and Japan would constitute a reevaluation of the trade in full.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

DailyFX forecasts on a variety of currencies such as the US Dollar or the Yen are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.