Recently, it was clear that the Bank of Japan's hints that its monetary policy was imminently shifting to an accommodative monetary policy contributed strongly to the price of the Japanese yen moving strongly against the rest of the other major currencies. Especially, against the dollar, as the US dollar/Japanese yen currency pair (USD/JPY) fell to the support level of 141.63 before returning to the top. Technically, it targeted resistance 146.58 yesterday and is stable around 145.36 at the time of writing the analysis. Therefore, the future of the currency pair depends on the future of central banks' policies. Particularly, from Japan, where markets have long been waiting for a shift in negative interest policy.
On the other hand, this week, the focus will be on the US Central Bank’s policy announcement, amid strong expectations to maintain US interest rates, but there will be a focus on the bank’s policy statement and expectations report. Commenting on this, Eli Henderson, an economist at Investec, said, “we are monitoring the new expectations for US interest rate levels at the Federal Reserve”.
Also, she said that the last time we received forecasts in September (including the famous dot chart, which anonymously displays FOMC members' expectations about the path of interest rates). Thus, the median view on the committee was that the target range for the Fed's funds would expire. This year at 5.50. -5.75% any further increase. She added that given the progress on inflation and slightly weaker economic data at the beginning of the fourth quarter (such as retail sales), we do not expect this final rise to occur for the year. Therefore, what will matter most is the path after that, with markets and economists disagreeing on the likely pace of interest rate cuts next year.
Meanwhile, Investec expects concerns in the committee to lean towards the threat of a return of inflation rather than the fear of a deep deflation in the absence of faster interest rate cuts. Furthermore, as for the outlook, we expect the FOMC to cut interest rates further next year than it set in September but show restraint on market rates. From a Forex market perspective, this will be supportive for the US dollar.
USD/JPY Technical analysis and Expectations Today:
Technically, the price of the USD/JPY formed lower highs linked to a trend line that has been holding since mid-November. The price seems ready to test this resistance level again. Also, the Fibonacci retracement tool shows levels where sellers may be waiting for a jump in the downtrend. Nearby, the 61.8% Fibonacci level closest to the trend line is located around the key psychological mark of 146.00, which may be enough to keep gains under control. Therefore, USD/JPY may resume its decline to its lowest level at 141.62.
On the other hand, a breakout above the Fibo levels and trend line could trigger a reversal to the upside. Moreover, technical indicators indicate a continuation of the downward trend. Currently, the 100 SMA is below the 200 SMA to confirm a downward shift in the trend or that a sell-off is more likely to gain momentum rather than a reversal.
Distinctly, the stochastic has a little room to rise before reaching the overbought zone to indicate exhaustion among buyers. However, the oscillator may be ready to head lower soon for the price to follow suit. Likewise, the RSI has some ground to cover before reaching the overbought zone, so it can follow the price while there is upward pressure.
finally, in the absence of any new BOJ headlines, USD/JPY traders may now focus their eyes on US inflation data and the Fed's decision. Obviously, US headline inflation is expected to slow somewhat, but the core rate is expected to remain steady at 4.0%. which is unlikely to change the market's current implied trajectory much, especially just one day before the Fed's decision is announced.
