USD/JPY: Breaks below 200-HR SMA and looks to 20-DMA at 110.25

• USD/JPY breaks key support and runs risk of a test down to 20-DMA.
• USD/JPY: Markets will now look to Chinese manufacturing and US GDP data later this week.  

USD/JPY had been testing the upside resistance, old support, at 111.20 but the bulls have capitulated there and the 200-hr SMA has just given out, provoking a sell-off to lows of 110.42 so far.  

The dollar is weak across the board, with the DXY dropping below the 96 handle, marking a low of 95.98 so far and extending the bearish case below the H&S neckline. US yields are also extending their downside below trendline resistance and are printing a low of 2.6280% in the 10-year benchmark measure.  

Fed Powell sticks to patients

This is not a risk-off move, so bears might find limited potential in chasing the offer at this juncture as the DXY stalls at a key support line made up of Jan support and resistance and late Jan highs.  Markets are stepping on the gas with respect to the Fed, expecting potential rate cuts should the US economy hit a road bump along its path to recovery. Fed’s Powell did not specifically reiterate that the Fed may continue to increase rates if the economy evolves positively but instead, he reiterated a patient approach. Powell, did, however, stress that the economy still remains strong and that the Fed is ready to adjust balance sheet normalisation if needed.  

“Risk markets took the testimony in their stride, but weak US housing data remains a worry,” analysts at ANZ Bank argued, adding, “housing starts plunged 11.2% m/m in December (Nov: 0.4%, mkt: -0.1%). Whether the volatility in the data recently has been affected by the government shutdown remains to be seen, but it certainly provides food for thought for cautious Fed officials. In contrast, housing permits rose 0.3% m/m (Nov: 4.5%, mkt: -2.6%) suggesting there’s some rebound in the pipeline.”

Looking ahead

As far as risk events go, markets will now look to Chinese manufacturing later this week and US GDP. Traders will also keep a close eye on Dr. Copper which seems to be giving the global economy a clean bill of health considering where it stands in its 2019 recovery.  US trade talks with China have offered a positive spin on the state of the global geopolitical environment that can directly be related to the outlook for the health of the economy, although the bigger issues between China and the US must still be addressed.  

USD/JPY levels

USD/JPY dropped from the trendline resistance, old support which had been guarding much tougher level of resistance up at the 200-day ma and the October low at 111.31/41. A break of the 200-hr SMA now opens risk to the 20 day ma and 55 day ma at 110.25/13 which guards the base of the channel at 109.41.