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For the past few weeks, EURJPY has been contained to a 132.00-133.00 zone as the push/pull tug of war between bulls and bears provided no clear winner. The market essentially remains in a “show me” mode as traders await the FOMC rate decision and more importantly its guidance about the growth and inflation in 2018.
While the chance of a rate hike tomorrow is 100%, the much more important question is whether the Fed has now moved unambiguously into a tightening mode as it tries to normalize policy. If the statement tomorrow looks past the weak inflation numbers and instead upgrades the growth forecast the dollar is likely to rally hard against the yen, but may not necessarily gain much ground against the euro as markets will assume that Fed’s upbeat outlook will spill over into global demand and will, therefore, force the ECB to become more hawkish as well. That’s why EURJPY may be the best yen cross for a bullish FOMC day especially if it breaks above the 135.00 resistance level clearing the way for a strong rally into the year-end.
Tomorrow the marquee event of the month finally arrives. The Fed meeting could set the tone for USDJPY trade for weeks to come. The issues are well known. If the Fed hints that it is open to more than 2 rate hikes in 2017, the greenback will soar as US yields surge. If on the other hand the Fed remains non-committal and keeps the dot plot at the current level, the dollar is likely to sell off. So instead of speculating about direction, it may be worthwhile to consider the key levels in USDJPY should either scenario pan out.
The dollar bullish trade could quickly take USDJPY towards the 117.00 level but beyond that the pair runs into much more chunky resistance at the 118.00 level from the start of this year. Beyond that, the 120.00 figure will act as massive resistance for the rest of the year.
In dollar bearish scenario the first level of support is 113.00 but given the very overbought nature of the pair USDJPY could easily slip towards 111.00 and even possibly 110.00 on paring of positions into the year end.