USD/JPY: headed to 112.60?

USD/JPY has started out the week on the backfoot with bears riding the poor data from the US shift on Friday that has markets reducing odds of a Fed hike in June.

The week ahead: eyes on US IP (Tuesday) and other key global economic events

However, the Fed fund futures yields are still pricing in an 80% chance (from around 90% the previous day) and US inflation and retail sales were only slightly disappointing. "FOMC member Evans was “ok” with one more hike this year and would be surprised at more than two, seeing inflation still below 2%," noted analysts at Westpac, adding, "he also expects balance sheet reduction to start before year end, and noted that Trump’s tax plans could either be substantial or not pass. Harker supported two more hikes in 2017, noting the economy is normalising and the labour market is in good health." 

USD/JPY's rally, however, has topped out around 114.30 via a bearish outside range reversal. The price action since is suggesting the USD may retreat near-term to retest the breakout from the longer-term bear channel down to 112.60. US yields will be a key focus this week in respect of this pair while from the calendar, Tuesday's US session will hold industrial production as the next key catalyst.

USD/JPY levels

USD/JPY has failed to clear 114.38 for 3 sessions now and the slow stochastics indicator is rolling over – both suggest that we are likely to see a near-term dip lower, argued analysts at Commerzbank. "The market has recently eroded the 112.60 resistance line and the top of the cloud at 112.81. We look for a challenge of the 115.51/62 mid-January high. Above here will target the 116.90 2015-2017 downtrend. Intraday Elliott waves counts suggest that we should allow for a retracement to approx. 112.95/112.05 ahead of further gains."