USD/JPY Forecast: Sell-off Likely If Support At 105.32 Is Breached

• Dollar rallies likely to be short-lived as markets see slower Fed rate hikes.
• Previous day's gravestone doji-like pattern and bearish momentum studies indicate bears are in control.

Having created a bullish outside day candle on Monday, the USD/JPY pair rose to a high of 105.90 yesterday before falling back to 105.32.

The retreat from 105.90 to 105.32 could be associated with the tech-led drop in the US equities. The Asian stocks also traded risk averse on Wednesday, still the USD/JPY picked a bid, possibly due to fading North Korea risks.

That said, the dollar rallies will likely be short-lived as short-term interest rate futures are pricing-in only about 75 basis points of tightening by the end of 2019, i.e. the market expects interest rates to be at 2.5 percent at the end of 2019 vs. Fed's projection of 2.9 percent.

Further, the S&P 500 is more likely to revisit the February low of $2,530, according to the bear flag breakdown witnessed last week, in which case the Japanese  Yen will likely surge across the board.

Focus on US GDP

The third estimate of the fourth quarter US GDP, due at 12:30 GMT, is expected to show an improvement in growth rate to 2.7 percent after the measure of growth was revised downward to 2.5 percent in the second estimate (released four weeks ago).

So, will the greenback cheer an upward revision of the US GDP? A minor rally cannot be ruled out, but the gains could be transient as the rate market is pricing-in a slower Fed tightening.

Daily chart

Yesterday's gravestone doji-like candle suggests the erratic rally from the low of 104.63 (March 26 low) has ended at 105.90 and the pair could drop below 105.32, in which case the spot may challenge demand around 104.63 (Friday's low). Momentum studies favor the bears: 5,10, and 21 MAs are trending lower, indicating a bearish setup.

A close below 104.63 would open doors for a drop to 101.19 - the starting point of the Trump rally (as suggested by the bearish weekly chart).

On the higher side, only a daily close above 106.64 (March 21 high) would abort the bearish view and could yield a rally to 107.91 (Feb. 21 high).