USD/JPY fell from 114.04 to 113.44 on the "just below", not "far away" from neutral policy rate comment overnight having been creeping higher onto the 114 handle for a fresh short term high, albeit, shortlived. However, bears are not out of the woods yet, and it may be that the market has overreacted which would mean positioning back in towards the 114 handle as we approach the G20 showdown. However, at this juncture, the street's assessment of the US and the global economy has been met by Powell. The markets have long doubted that the current economic cycle would survive 3 percent Fed Funds; Indeed, Powell's shift appears to be well justified and the futures market sees peak Fed Funds near 2.75%, and the last Fed dot plot forecast is at 3.375%.
A more data dependent Fed to keep a lid on the widening of the JP/US spread
A more data dependent Fed is probably going to keep a lid on the widening of the JP/US spread and depending on the outcome of the Xi/Trump summit, it is hard to say whether the dollar can attract demand on a negative outcome. The yen's risk-off profile can and we could see a much higher JPY into year end. That said, repatriation flows in the dollar are likely to support. As for US yields, the 10yr treasury yield dropped from 3.07% to 3.04%, while 2yr yields fell from 2.84% to 2.79%. the Fed fund futures have continued to price the chance of the next rate hike on 19 December at 80%.
Wall Street records solid gains following Powell's dovish shift
US dollar bulls pack their bags as bears take DXY down to test critical trend line support and 38.2% Fibo confluence
Support levels: 113.35 112.90 112.55.
Resistance levels: 113.75 114.05 114.50.