USDJPY has the potential to be particularly active this week as a crucible for traders with central bank on both sides of the pair holding big monetary policy meetings that could see them heading in opposite directions.
Since December, when the Fed last raised interest rates, USDJPY has been trending downward, in other words, JPY has been outperforming USD. Although its primary falling channel remains intact, support has emerged above 99.00 and the 100.00 round number and base building appears to be underway.
Higher lows in the RSI indicate that downward momentum is slowly fading although it has picked up a bit in the last few days. Although the pair failed to hold above its 50-day average again, it continues to attract support at a higher low above 101.00 with a double bottom in place near the 100.00 round number.
Further declines for the pair below 101.00 could see it retest the 99.00 to 100.00 area. Should it turn upward, it faces downtrend line resistance through 102.75. If it can clear that hurdle, it would signal the start of a new uptrend with next resistance possible near 103.45 then 104.25.
Both sides of this pair could drive action this week. Even though the Bank of Japan cut interest rates into negative territory earlier this year, traders took that as a sign of weakness and plowed cash into Japanese government bonds as a safe haven driving JPY up rather than down. Chatter over the last few days suggest the Bank of Japan may be looking at a small cut to (0.2%) from (0.1%) but the big question is how the market would react to stimulus. The Bank of Japan would like to see stimulus weaken the currency as one would normally expect but traders have stubbornly refused to follow the parry line. As such, depending on how much stimulus, if any comes out of this meeting we could see a big move in JPY.
USD, meanwhile has been up and down ahead of this week’s Fed meeting which looks like it could be a contentious one. With no Brexit meltdown having occurred, the US approaching full employment and inflation picking up, an increasing number of Fed members want to raise interest rates, having held off in June. Soft retail sales and other factors have the street thinking a rate hike is less likely with Fed Funds only pricing in 18% odds of a hike.
I think it’s about a 40% chance the Fed hikes rates and a 60% chance the Fed hints toward a December increase. A rate hike now would surprise the street and boost USD, a hint toward December could be seen as in line and may not have as big an impact, no hint toward December would be seen as dovish and could send USD lower.
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