USD/JPY Forecast: Drop To 200-Day Moving Average Likely

The Dollar-Yen pair ended on a flat note on Wednesday as record highs on Wall Street negated the impact of less hawkish Fed minutes. The currency pair clocked a high of 112.52 in Asia and currently trades around 112.27 levels.

Fed minutes revealed the following:

• Many Fed officials saw another rate hike warranted this year
• A couple of officials expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability
• Members agreed that, in October, the Committee would initiate the balance sheet normalization program described in the June 2017 Addendum to the Policy Normalization Principles and Plans
• Officials generally expected that any reaction in financial markets to the start of balance sheet normalization would likely be limited
• All officials agree that a gradual approach to increasing the federal funds rate will likely be warranted, although a few Fed officials wanted hikes delayed until inflation higher
• Several Fed officials stress the need to remain data dependent
• A few officials pointed to upside inflation risks due to tight jobs
• Several officials noted that interpreting the next few inflation reports would likely be complicated by the temporary run-up in energy costs and in the prices of other items affected by storm-related disruptions and rebuilding.
• Most officials expect tight labor market conditions to eventually push up wage price inflation

Key takeaways- Fed minutes were less hawkish than expected

• An interest rate hike later this year is nearly a done deal, despite some divisions over where inflation is headed
• However, division on inflation does mean the Fed could backtrack from its plan to hike rates three times in 2018 if price pressures remain subdued
• The minutes did not shed light on whether all policymakers agree or some dissent on the Fed's plans to hike rates three times in 2018.
• The December rate hike has been priced-in, hence an upside break in the USD/JPY could be seen only if the US inflation numbers due tomorrow beat estimates.
• Technical charts indicate the spot is more likely to test and possibly breach the 200-day moving average support ahead of the weekend.

Daily chart

Observations

Repeated failure to take out 113.00 over the last two weeks has left a rounding top pattern
The topping pattern has been formed around the trend line sloping downwards from the Jan 2017 high and July 11 high
Bearish 5-DMA and 10-DMA crossover
View

The pair is likely to test the 200-day moving average support of 111.83. An end of the day close below the same would add credence to the rounding top pattern and shall open doors for a drop to 110.70-110.50 levels.

On the higher side, only a close above 113.00 would abort the short-term bearish view on the USD/JPY.