USD/JPY risks falling to 116.00 levels in short –term

The USD/JPY pair has been struggling to rise above 118.70 levels since past few sessions despite of a positive surprise from the European Central Bank (ECB) and a consequent rally in the global stock markets. The US 10-year Treasury yields too have a hard time extending gains above 1.83-1.85% levels.

The USD/JPY pair is likely to test 116.00 levels in the short-term as

• ECB’s QE priced-in, European stocks may see profit booking - The stock markets have not been able to do much after the ECB surprised markets with its 1 trillion Euro QE program. The German DAX, trading at record high levels, is likely to see a bout of profit booking.

• Tensions in Greece may escalate - Global markets are likely to be jittery after the victorious leftist Syriza party in Greece formed a coalition government with an unlikely ally: the right-wing Independent Greeks party – also anti-austerity. The victorious party has already made it clear that Greece’s debt is unsustainable and cannot be paid back, while the IMF's managing director, Christine Lagarde, ruled out special treatment for Greece's debt situation. Thus, safe haven assets are likely to rise as all eyes are on the party's unlikely coalition and what this could mean for its radical policies.

• FOMC likely to be a non-event - The January FOMC meeting will not have any economic forecast updates not any press conference. The Fed may remove “considerable time” language and writing “patient approach” to policy. However, significant market reaction is unlikely as the markets have treated the two phrases almost equivalent from the time they appeared in December statement. If anything, a surprise may come in the form of a slightly dovish statement amid non-stop action from other central bankers across Europe. The Fed may turn slightly dovish citing a weak consumption despite drop in energy costs. Thus, the Treasury yields are likely to extend the slide, thereby supporting Yen.

• US Q4 GDP expected to drop - The preliminary data due for release on Friday is likely to show US Q4 GDP cooled down to 3.0%, from the previous quarter’s final reading of 5%. Moreover, the 10-year yields in the US have declined sharply to 1.8% despite a 5% GDP in Q3. Hence, below 5% preliminary Q4 reading is likely to result in more weakness in the Treasury yields.

On Technical grounds, a repeated failure to rise above 118.70 levels is likely to weigh on the pair. Furthermore, the bearish view remains intact so long as the pair trades below 50-DMA at 119.01 levels.

Thus, a sell-off anticipated at the current level of 118.00 provides an attractive risk reward ratio.