Will the Fed Help or Hurt USD/JPY?

Will the Fed Help or Hurt USD/JPY?

Will the Fed Help or Hurt USD/JPY?

Fundamentals

There has been no shortage of volatility in USD/JPY pre FOMC. The currency pair started the Asian trading session just under 118, dropped to a low of 115.57 in Europe before ending the North American trading session around 117. While the move was driven by the wild volatility in oil and the consequences of Russia’s rate hike, the dollar recovered strongly on the hopes that tomorrow the Fed will take another step towards policy normalization. However today’s volatility makes the central bank’s decision more difficult because an overly hawkish bias could send global equities tumbling further. So while we still expect the Fed to drop its considerable time language from the FOMC statement, Janet Yellen may attempt to downplay changes, which would minimize the positive impact on the dollar. We would not surprised if the greenback sold off as a result as the year end approaches and the lack of an unambiguously positive bias triggers additional profit taking on long USD/JPY positions. In order for USD/JPY to reach 120 in 2014, the Fed needs to be very hawkish and Yellen needs to say specifically when rates will rise. Anything short of that could actually be negative for the currency.

Technicals

Taking a look at the daily chart of USD/JPY, if the 115.50 support level breaks, the next target for a decline should be the 100-day SMA right below 112. If 115.50 holds and USD/JPY breaks back above 118, the rally should extend as high as 120, which is not only a psychologically significant level but also the 61.8% Fibonacci retracement of 1998 to 2011 decline.

Chart Of The Day

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