The U.S. dollar rallied overnight after Janet Yellen’s speech clarified that she may be leaning towards a December rate hike. Her testimony after the Fed’s decision to keep rates steady at the September 17th meeting appeared rather dovish and many market participants wrote off any rate hikes until March or later.
The dollar extended its rally after the final reading for second quarter US GDP came in better than expected with a 3.9% reading. This was considered a very strong revision because both the forecast and prior reading was 3.7%. Core PCE was upgraded to 1.9% vs a prior 1.8% reading.
The USD/JPY daily chart shows that price formed a bearish butterfly pattern on June 5th and that ended with the formation of a bullish butterfly pattern on August 24th. For most of the month of September range bound trading occurred with price respecting the 200-day SMA. With Yellen’s comments and the strong GDP revision, price is now tentatively breaking out above the 200-day SMA and could be poised for a rally targeting the 123.00 area. If over the next couple of trading sessions, price remains above the 121.00 level, we could see a strong bullish tone remain in place for the next week or two.
If bullish momentum fails to extend its gains, we could see price find support around the 120.00 handle.
The trade: Buy USD/JPY 120.50, with a stop loss at 119.75 and take profit at 122.75. The risk/reward ratio is 1:3