A state of instability and caution dominates the performance of the USD/JPY exchange rate since the start of this important and exciting week's trading. It settled around 132.60 at the time of writing the analysis. The decisions of the US Central Bank meeting today are unusual, as they came in light of a severe banking crisis that came as a result of the course of raising the US interest eight times in a row to contain the record US inflation.
Bond traders lack real conviction about the Fed's policy intentions for the first time since the central bank's tightening frenzy began a year ago. Ahead of the Fed's decision on Wednesday, swaps are priced at just an 80% chance of a quarter-point hike in the US interest rate. This marks a departure from every other US Federal Reserve meeting over the past year where traders have priced in at least one such move in its entirety.
Instead, the debate so far has been about whether to raise interest rates in increments of 25, 50 or 75 basis points.
The relative lack of conviction underscores the complexity of the problem facing policymakers in the wake of the first major US bank failures in more than a decade. Many investors and economists now see reason for the pause, which would allow the US Federal Reserve time to assess the damage and the impact of the emerging credit crunch among regional lenders on the economy.
Uncertainty in the markets is reflected among professional forecasters, too: 11 out of 98 economists surveyed by Bloomberg expect the US Federal Reserve to announce a pause on Wednesday, while one shop — Nomura Securities — expects a quarter-point rate cut. Matters are muddied at this point by the fact that recent jobs and inflation data indicate that the economy has responded little to more than four percentage points from the interest rate increases the central bank has implemented so far. Before the banks collapsed, that was the reason many officials were inclined to continue tightening and push the benchmark interest rate towards at least 5.5%.
Before the recent market turmoil, swaps were priced in for a continuation of the Fed's tightening cycle through September. Now, they point to a peak for rates in May. While US Federal Reserve Chairman Jerome Powell on Wednesday is likely to express confidence in the latest measures designed to reduce pressures in the banking system, economists and bond investors see regional lenders holding back from offering new loans and tightening standards. This may indicate that the US Federal Reserve will get a weaker economy and ease inflation pressures without having to push interest rates much higher.
Dollar expectations against the Japanese yen today:
- There is no change in my technical point of view, only the performance on the daily chart below.
- The general trend of the USD/JPY pair is still in a bearish shift.
- Stability below the support 131.00 will support stronger bearish breaches, and thus will move the technical indicators towards oversold levels.
- I expect new purchases of the currency pair if it moves towards the support levels of 130.75 and 129.00, respectively.
On the other hand, breaking the resistance 133.70 will be important for the bulls to start controlling the trend. Today, the currency pair will be affected by whether or not investors take risks, and it may remain in the same performance until the reaction to the US Central Bank’s announcement today.
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