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Fed facing a dilemma at today’s rate decision – where will the USD/JPY be headed?

September 18, 2019 09:30

Source: Economic Events September 18, 2019 - Admiral Markets' Forex Calendar

Today, all eyes will be on the Fed rate decision. This is particularly true, as the BoJ rate decision also occurs from Wednesday to Thursday.

In regards to the Fed, the Fed Watch Tool shows that market participants expect a rate cut by 25 basis points with around 80% probability, what means that the main focus of market participants will be concerned with what will be delivered in the Fed statement.

Will the Fed dot plot suggest FOMC members to see further rate cuts in the upcoming 12 – 18 months? Where will the economic projections be, especially with the ongoing tensions in the trade dispute between the US and China.

And after the latest developments in Saudi Arabia, where an attack on Saudi oil facilities responsible for 5% of global supply and resulted in the biggest intra-day percentage gain in oil since the Gulf War in 1991, a near-term pick-up in inflation seems very likely.

The Fed could be assumed to not just reflect the state of the US, but also global economic growth (due to an ongoing trade war between the US and China), rising inflation, on the other hand, leaves the US central bank in a dilemma.

So, it is difficult to say which direction the USD/JPY will be headed after the Fed, but we would assume that a more dovish stance in the Fed's overall rate outlook could trigger USD/JPY weakness.

We will probably have to wait until the BoJ delivers their statement, but our assumption is that one of the main drivers for the USD/JPY to gain further momentum after recapturing 106.80/107.00 over the last week was not only the (at least felt) de-escalation of the US-Chinese trade dispute.

But also rumours made rounds that the BoJ could consider cutting rates into deeper negative territory. Such a step is among the key options of the BoJ, although the central bank may need to accompany that with measures to mitigate the pain any such move could inflict on financial institutions.

That said, if such a step is not brought up in any way, JPY could regain the recent losses, and also result in a drop in the USD/JPY down to and back below 107.00.

Below 108.50/109.00 we consider the picture on a daily time-frame to be bearish with a drop below 105.80 triggering a wave of further selling and quickly activate the region around 105.00 again:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between June 18, 2018, to September 17, 2019). Accessed: September 17, 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.

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