USD/JPY Forex Technical Analysis – Interest Rate Spread Tightens as Powell Says Rate Hikes May Slow

The Dollar/Yen finished lower on Wednesday after Federal Reserve Chairman Jerome Powell on Wednesday said it was time to slow the pace of coming interest rate hikes while also signaling a protracted economic adjustment to a world where borrowing costs will remain high, inflation comes down slowly and remains chronically short of workers, Reuters reported.

On Wednesday, the USD/JPY settled at 145.389, up 0.649 or +0.45%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $67.57, up $0.36 or +0.53%.

Traders Reacting to Tightening Interest Rate Differential

The 10-year Treasury yield dipped Wednesday after Powell’s latest remarks on future monetary policy moves by the U.S. central bank.

The benchmark was down nearly 12 basis points at 3.633% after trading above 3.8% earlier in the session. The 2-year rate was down 13 basis points on the day at 4.343%.

The drop in yields helped tighten the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive investment.

Short-Term Outlook

Ahead of Powell’s speech, the markets were pricing in about a 65% chance that the Fed would step down its interest rate increases to half of a percentage point in December. Following Powell’s speech, the probability for a half-point move rose to 77%.

This is a potentially bearish development, but Friday’s Non-Farm Payrolls report and next week’s U.S. consumer inflation report are going to have to support Powell’s assessment in order to seal the deal.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 137.499 will signal a resumption of the downtrend. A move through 142.254 will change the main trend to up.

The minor trend is also down. A trade through 138.895 will change the minor trend to up and signal the resumption of the uptrend.

The main range is 126.362 to 151.945. The USD/JPY is currently testing its retracement zone at 139.154 to 136.135.

Daily Swing Chart Technical Forecast

Trader reaction to 137.645 is likely to determine the direction of the USD/JPY early Thursday.

Bearish Scenario

A sustained move under 137.645 will indicate the presence of sellers. Taking out 137.499 will indicate the selling is getting stronger. This could lead to a quick test of the Fibonacci level at 136.135. This is a potential trigger point for an acceleration to the downside.

Bullish Scenario

A sustained move over 137.645 will signal the presence of buyers. This could trigger a quick move into the 50% level at 139.154. Overcoming this level will indicate the counter-trend buying is getting stronger.

Side Notes

The key level to watch is 136.135. This is a potential trigger point for the start of a steep break with 130.412 – 126.362 the next likely target area.