USD/JPY back below 107.00 as Wall Street tumbles

• Yen strengthens as equity prices in Wall Street extend losses. 
• USD/JPY erases gains and moves closer to a key technical support. 

USD/JPY moved to the downside during the last three hours amid a slide in Wall Street. Earlier the pair peaked at 107.19, following the release of the ISM report. Then it lost momentum and pulled back erasing all gains. Near the end of the US session it was hovering around 106.65/75 near the level it closed yesterday. 

Data, Powell, Trump and Dudley 

The ISM manufacturing index came in at 60.8%, the highest since 2004, up from 59.1% (previous months) and above 58.5% (market consensus). The greenback peaked across the board after the report and then lost strength. 

Fed Chair Powell did not boost the US dollar like it did on Tuesday on today’s testimony. He said there is no strong evidence of a decisive move up in wages and warned about fiscal policy putting upward pressure on inflation during 2018. According to him four rate hikes during 2018 defined a gradual move. 

William Dudley, president of the New York Fed, also signaled that four rate hikes this year would be “gradual” and added that the Fed cannot be too aggressive with inflation below the target. Asked about higher steel tariffs, he said that it could add more pressure in inflation and affect productivity. The question about tariffs came in after US President Trump unveiled his intention to impose import tariffs of 10% on aluminum and 25% on steel.

USD/JPY outlook 

In the very short-term the slide in equity prices offers support to the yen. USD/JPY is back under the 20-hour moving average and also near a key support region that includes 106.52 (daily low) and 106.35 (weekly low). In the US, the Dow Jones was falling 1.17% (1-week low) and the S&P 500 was down 0.85%. Concerns around the US economy growing so fast that it could push the Fed to rate hike more aggressively could be affecting stocks. 

A reversal in Wall Street could boost USD/JPY to the upside. Resistance levels are seen at 107.15/20, followed by 107.40 and 107.65 (Feb 27 high). 

The yen remains near weekly highs across the board on Thursday ahead of a weekend with two main risk events: Italian election and the SPD vote on the German coalition government.