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Is the USD/JPY about to drop lower on a very dovish Fed?

June 19, 2019 10:30

Source: Economic Events June 19, 2019 - Admiral Markets' Forex Calendar


Today, the eyes of the market will be on the Fed rate decision. And due to the yield sensitivity of the JPY, we want to focus on the USD/JPY.

After the weak NFPs, and the dovish comments from Fed chairman Powell around two or so weeks ago, combined with markets aggressively pricing in three rate cuts from the Fed until December - and we increasingly expect the first steps in that direction today. However, such expectations cooled a bit over yesterday, in response to the Atlanta Fed Tracker jumping to 2.1% from 1.4% after last Friday's Retail Sales data.

While the US dollar gained some momentum against the Euro or GBP, the JPY traded stable against the dollar which seems to come as a surprise, probably suggesting that bond and JPY traders are still very careful and consider a surprising cut from the Fed a serious option.

That said, any dovish rhetoric and/or surprising rate cut today is a potential bearish driver for the USD/JPY, leaving the currency pair vulnerable to a significant drop below 108.00 respectively the significant support region around 107.50/70.

Such a break lower levels the path down to the January Flash Crash lows around 105.00, especially if in addition to this outlook geopolitical tensions between the US and Iran keep on rising, triggering a risk-off move and leaving market participants unwinding their carry trades in JPY.

Technically speaking a drop lower stays an option as long as we trade below 110.70 on a daily time-frame:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between March 19, 2018, to June 18, 2019). Accessed: June 18, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the 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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