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Is USD/JPY Facing Volatility Ahead Of The FOMC?

Is USD/JPY Facing Volatility Ahead Of The FOMC?

Key Points:

  • FOMC volatility to impact USD/JPY.
  • Fed likely to hold FFR steady at 0.50%.
  • Hawkish rhetoric likely.

The USD/JPY started last week with a definite bias to the upside as the US Markit Flash Manufacturing PMI figures surprised the market at 53.2. This was followed by a strong Core Durable Goods Orders result on Thursday which, when combined with a flat Japanese CPI result of -0.5% saw the pair charging above the 105.00 handle.

However, the pair is facing a critical week as the FOMC gets set to meet to decide their interest rate regime. Subsequently, it makes sense to review what occurred last week and what potentially looms on the horizon.

Last week was relatively positive for the USD/JPY as the pair started the week with a strong US Markit Flash Manufacturing PMI result of 53.2. This was followed up in fairly short order by a robust Core Durable Goods Order figure of 0.2% m/m which saw the dollar-yen rapidly challenging the key 105.00 handle. However, the pair was unable to maintain this level as the US Michigan Consumer Sentiment figures came in weakly at 87.2 and sent the pair reeling to finish the session around the 104.58 mark.

The week ahead will largely focus upon the pending US economic figures with the US Non-Farm Payroll and US Federal Funds Rate decision falling due. The NFP results are likely to cause plenty of volatility given the difficulty in predicting the metric. The market estimates largely have the result at 175k but, as always, expect plenty of variation.

The FOMC meeting decision will also play a part in the pair’s direction, especially if the Fed re-confirms a bullish bias. Although the central bank is largely expected to keep rates on hold at 0.50%, Janet Yellen’s statement following the event will largely determine the near term trend.

From a technical perspective, the recent rally has reconfirmed the pair’s bullishness and taken price action above the 104.32 resistance point. However, the steam may have just run out of the move given that the RSI Oscillator is nearing overbought territory. Subsequently, our initial bias for the week is a tentative neutral and we expect price action to decline back below the 12 EMA over the next few days.

However, this may change depending on the Fed’s rhetoric following the rate decision in the middle of the week. Support is currently in place for the pair at 103.14, 101.72, and 99.92. Resistance exists on the upside at 105.52, 107.47, and 110.16.

Ultimately, the coming week is likely to decide whether the USD/JPY continues its recent bullish trend or, instead, returns to pressure the Japanese economy with significantly lower valuations. Much of this will depend on the rhetoric of the Federal Reserve and whether they continue to push the barrow of a December FFR rate hike. Subsequently, you can expect plenty of volatility for the yen, especially given the inherent uncertainty around the eventual decision.

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