The USD/JPY currency pair recently fell to a 3-week low, crashing beneath the key 112 level. The USD has come under increasing fire of late, after Fed chair Janet Yellen pulled the trigger on the federal funds rate. Currency traders and speculators were anticipating further hawkish commentary from the Fed after interest rates rose 25-basis points to 1%. However, the Fed stuck to its guns with just 2 rate hikes slated for the rest of 2017. Dollar traders took this as their cue to short the greenback sending it plunging to 5-month lows. The USD/JPY pair broke through critical support levels and retreated from the highs attained in December and January.
Selling pressure is being brought to bear on the USD, with the US dollar index hitting multi-week lows around the 99 level. The 52-week high for the US dollar index is around 103, and multiple successive sessions of losses have added pressure to the DXY. Even Treasury bond selloffs have been unable to halt the decline in the USD, which is moving contrary to the forecast direction post Fed rate hike. The US economy has been performing well, but the release of better-than-expected current account deficit data for Q4 2016 did little to assuage concerns of traders. The USD fell, and markets moved in unison.
US Equity Markets Face Fresh Selling Pressures
The bulls have retreated from Wall Street in a big way. Most major US indices have endured a 2-day losing streak, with sharp losses being recorded on the Dow Jones Industrial Average, the NASDAQ composite index and the S&P 500 index. The Dow Jones is down 0.52% over 1 month, the S&P 500 index is down 0.90% over 1 month, and the NASDAQ composite index is down 1.14% over 1 month. Both the S&P/TSX composite index and the NYSE composite index are also down sharply. This is due to a reversal in sentiment taking place about the state of the US economy. When currency traders short the dollar, because the Fed fails to provide adequate bullish commentary in its statement, stock markets also retreat.
Across the Atlantic, much the same was seen. The Euro Stoxx 50 PR, the Ibex 35, the FTSE 100 index, the CAC 40 and the DAX 30 all ended in the red. The performance of US indices has also assisted the JPY in its recovery towards the critical 100 level against the greenback. Recall that the JPY is a safe-haven currency and it acts in much the same fashion as gold. Whenever traders get nervous about the performance of the USD, or the CNY, they flock to the JPY for security. Fortunately, not all US currency traders were caught on the back foot – put options with CFD Trading activity were rampant in recent days, leading to strong gains in the FX trading arena.
What Is the Outlook for the USD/JPY Currency Pair?
Now that the USD/JPY pair has broken beneath the critical 112 level, accelerated declines are likely. Prior to this level being breached, flat trading was expected. The current resistance level is around 113.10, but that seems an unlikely target given the current trends. If projections hold true, the pair could slide towards 111.60, or less. Overall, the trend index is pointing bearish. Reversals are likely if further quantitative easing takes place in Japan, or US monetary policy becomes appreciably more hawkish with strong statements from FOMC policy members. Additionally, the release of US economic data which supports strong growth forecasts will bolster USD strength. If President Trump gets any traction with corporate tax cuts in the region of 15% – 20%, or he is able to expedite deregulation measures for the corporate sector, the USD will get a Trump Bump. Until then, it’s a slippery slope for the USD/JPY pair.