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USD/JPY Rate Outlook Hinges on FOMC as Bearish Series Snaps

USD/JPY Rate Outlook Hinges on FOMC as Bearish Series Snaps

David Song, Strategist

Japanese Yen Talking Points

USD/JPY holds a narrow range following the mixed developments surrounding the U.S. Gross Domestic Product (GDP) report, but the exchange rate stands at risk of facing range-bound conditions ahead of the Federal Open Market Committee (FOMC) meeting as it snaps the recent series of lower highs.

Image of daily change for major currencices

USD/JPY Rate Outlook Hinges on FOMC as Bearish Series Snaps

Image of daily change for USDJPY

Despite the downtick in the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, the 4.1% expansion in the growth rate should keep the central bank on track to further normalize monetary policy as ‘recent data suggest that growth of household spending has picked up.’

The 4.0% rise in Personal Consumption may encourage the FOMC to adopt a more hawkish tone as inflation holds around the 2% target, and the Chairman Jerome Powell & Co. may utilize the August 1 interest rate decision to prepare U.S. households and businesses for an imminent rate-hike as ‘the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate.

Image of Fed Fund Futures

With that said, Fed Fund Futures may continue to reflect expectations for four rate-hikes in 2018 as market participants currently price a greater than 60% probability for a move in December, and the fresh batch of Fed rhetoric may influence the near-term outlook for USD/JPY especially as the Bank of Japan (BoJ) is widely expected to stick to the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control in August.

Keep in mind, USD/JPY remains at risk for a larger correction as both price and the Relative Strength Index (RSI) fail to preserve the upward trends from earlier this year, and recent price action warns of range-bound conditions as the exchange rate snaps the recent series of lower highs.

USD/JPY Daily Chart

Image of USDJPY daily chart
  • There appears to be a shift in USD/JPY behavior as the upward trend unravels, and the exchange rate may face range-bound conditions over the coming days as it snaps the series of lower highs carried over from the previous week.
  • Another closing price below the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) region keeps the monthly-low (110.28) on the radar, with the next region of interest coming in around 109.40 (50% retracement) to 110.00 (78.6% expansion).

For more in-depth analysis, check out the Q3 Forecast for the Japanese Yen

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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