The dollar goes from strength to strength as market participants grow more confident in foreseeing a rate rise in the U.S. before the year is out. If the FOMC’s last policy meeting minutes, due to be published later on today, convey a more hawkish tone than what the market is expecting then this will only increase rate hike expectations further. Not only has U.S. data steadily improved in recent months, the probability that Hillary Clinton – rather than Donald Trump – will become the next U.S. President has also been rising in the wake of the second TV debate. Only a shock victory for Trump would probably derail the dollar rally, as we don’t expect U.S. data to all of a sudden turn weak in these last few of months of 2016. And as I have been banging on about it over the past couple of weeks, almost every other major central bank except the Fed will most likely remain dovish for some time yet. This is why we have seen strong downward moves in the likes of the British pound/U.S. dollar (GBP/USD), Euro/U.S. dollar (EUR/USD) and New Zealand dollar/U.S. dollar (NZD/USD) currency pairs, while the U.S. dollar/Swiss Franc dollar (USD/CHF) and U.S. dollar/Japanese yen (USD/JPY) currency pairs have appreciated.
In fact we wrote about the prospects of a rally in the USD/JPY even before the moves happened. Specifically, we highlighted the technical importance of the 100-101 area, which as well as representing a psychological level (100) was also a significant support area in the past. The updated chart of the USD/JPY, below, shows that a key downward trend has now broken down and several resistance levels have been taken out, too. The short-term path of least resistance is clearly to the upside. As such, I wouldn’t be surprised if the key 104.00-104.500 resistance area, which was being tested at the time of this writing, also breaks down soon—though ahead of the FOMC minutes, we may see some profit-taking from the longs.
If the USD/JPY pushes onwards and upwards as we expect it might then the next bullish objective could either be at the 107.50 area—which represents the prior swing high—or at 108.05, where the 200-day moving average comes into play. At this stage, a closing break below short-term support at 102.80 is required to invalidate this short-term bullish outlook. Should that happen, then the support levels at 101.85, 101.25 and 100.00 would become the next price objectives for the bears.