USD/JPY dropped like a rock after the Federal Reserve raised interest rates. Investors completely ignored the rate hike, focusing instead on the dot pot and Fed President Kashkari’s dissent. They were disappointed that today’s decision to raise interest rates was not unanimous as Kashkari preferred to leave rates steady this month and the Fed sees only 2 more rate hikes this year. The dot plot did not shift to 3 rounds of tightening and Janet Yellen was not hawkish enough to rescue the dollar. While she talked positively about the labor market and business sentiment, she also felt that not much had changed since December. She did not offer anything more than to say that 3 rate hikes qualifies as gradual and they expect policy to remain accommodative for some time. The disappointment can be felt across the financial markets because aside from the fall in the dollar, 10 year Treasury yields dropped 10bp and Fed Fund futures went from pricing in a 60% chance of a 25bp hike in June to a 46% chance. These odds could fall further in the coming days as bond traders adjust expectations in light of Yellen’s comments and recent data. If that happens and we think it will USD/JPY could sink as low as 112.50.

Technically, today’s sell-off has taken USD/JPY below the 20 and 50-day SMA along with the 23.6% Fibonacci retracement of the 2011 to 2015 rally AND the 23.6%. retracement of the June 2016 to Dec 2017 rally. There is some support at the 100-day SMA near 113 but the main level to watch once 113 breaks is the 50% retracement of the 2015 to 2016 move near 112.50.