FOMC Meeting Should Relieve USD/JPY of Tight Range

Talking Points:

- USD/JPY has been trading between 101.20 and 101.95 this week.

- USD/JPY has failed to recover with equities post-Crimea.

- Watch US Treasury yields for directional guidance on USD/JPY.

The US Dollar is at risk for a greater breakdown if today’s Federal Open Market Committee (FOMC) meeting reveals a new dovish bias from the Federal Reserve. While a $10B taper is priced into the market, the historically most interest rate sensitive pair, the USDJPY, is not taking the news so well. There is fear that a new wave of dovish commentary could be on the way.

For the USD/JPY, today’s FOMC meeting is critical because of the expected shift in the committee’s forward guidance policy. As it stands, the FOMC is prepared to keep rates extended at ultra-low rates for the foreseeable future, only willing to enact rate hikes after the unemployment rate falls through 6.5% and after QE3 is fully-tapered. The first two cuts to QE3 were $10B each in December and January, leaving a pace of $65B in asset purchases per month.

The catalyst for a USD/JPY move shouldn’t be on the announcement that QE3 has been reduced to $55B per month. Instead, we’re looking to see if and how big of a “cushion” the FOMC brings to the table. Traders should watch to see how far this new qualitative guidance extends for: how much time will elapse between the end of QE3 and the first interest rate hike, assuming the unemployment rate is at or below 6.5%?

Barring an opaque statement, the first full FOMC meeting (including a press conference) run by new Fed Chair Janet Yellen should contain the catalysts the USDJPY needs to break its tight range that its formed this week between ¥101.20 and 101.95.

USD/JPY Daily Chart: November 11, 2013 to Present

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Before we look at the range that has developed this week, it’s best to step back and see why the support laying just below the current USD/JPY price is so important. After the February NFP beat, the USD/JPY rallied into but failed to close above the trendline from the November 2012 and November 2013 lows; and an inverted hammer formed on the daily chart on March 7 as highlighted on the above chart.

The sideways range that has formed since the break of the longstanding uptrend (blue lines) encompasses a failed attempt to retake the trend. This breakout and backtest pattern is not uncommon; and further downside from the current USD/JPY price levels would suggest that a bear flag formed since the end of January, indicating a top just above 105.00.

USD/JPY H1 Chart: February 24 to Present

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A closer look at the H1 timeframe sees the USD/JPY ranging between 101.20 and 101.95 for the past several days. 100.20 held as support in early-March, and a break below this level would see sellers overcoming buyers at the monthly low – an indication of further downside emerging. A drop below 100.75 would potentially spell “doom” for the USD/JPY, considering that represents the yearly low and the supply of willing buyers at said price had been overcome.

In the event that the FOMC turns into a hawkish scenario for the US Dollar, the immediate levels to look higher into are 101.95 and 102.95, which served as resistance since the last week of January. Whichever way the FOMC bias shifts towards – how big of a cushion the Fed is willing to inflate – will help USD/JPY breakout of its recent dull range.

--- Written by Christopher Vecchio, Currency Analyst

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