USD/JPY PRICE OUTLOOK: US DOLLAR TO JAPANESE YEN HINGES ON FED CHAIR POWELL, NEGATIVE INTEREST RATE POLICY REMARKS
- USD/JPY price action flirts with a major inflection point underpinned by its 50-day moving average
- US Dollar volatility looks set to rise around a highly anticipated Fed Chair Powell speech scheduled for Wednesday
- FOMC officials have spoken out against negative interest rate policy but the US central bank has a history of capitulating to dovish market expectations
The US Dollar and Japanese Yen are the two top performing currencies year-to-date relative to their major peers. Demand for safe-haven currencies, which stems from coronavirus recession fear, appears as the primary driver for recent strength in the US Dollar and Yen.
USD/JPY price action trades roughly flat since January, however, due to the offsetting tailwinds impacting the Dollar-Yen cross. That said, spot USD/JPY looks primed for a big move in the near future as the interest rate sensitive FX pair shifts focus to an influential fundamental catalyst: the upcoming speech from Jerome Powell, Chair of the Federal Reserve.
US DOLLAR EYES IMPLIED FED FUNDS FUTURES, POWELL COMMENTARY ON NIRP
US Dollar outlook is currently clouded by outstanding uncertainty that surrounds forward guidance from key FOMC officials, but that could soon change with Fed Chair Powell scheduled to deliver remarks this Wednesday, May 13 at 13:00 GMT.
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Fed Chair Powell is widely anticipated to provide commentary on whether the US central bank has any appetite for negative interest rate policy, or NIRP. This comes subsequent to the implied Fed funds rate flipping negative last week according to interest rate futures for December 2020 as bond traders ramp up dovish bets.
Several Federal Reserve officials, like Robert Kaplan and James Bullard, have already voiced opposition this week to implementing negative interest rates in the United States. Yet, various FOMC members, in addition to Fed Chair Powell, have alluded to the possibility that the central bank may need to do more in terms monetary stimulus being provided to keep financial markets functioning and the US economy supported.
USD/JPY PRICE CHART: DAILY TIME FRAME (15 FEBRUARY TO 12 MAY 2020)
Seeing that US Dollar currency volatility could accelerate over the next few trading sessions as market participants react to the latest language from Fed Chair Powell, spot USD/JPY price action correspondingly appears at risk. This is also indicated by USD/JPY implied volatility, which was just clocked at a two week high for the overnight tenor.
| Change in | Longs | Shorts | OI |
| Daily | -1% | 1% | 0% |
| Weekly | 2% | 16% | 13% |
Meanwhile, spot USD/JPY is perched slightly below its 50-day moving average near the 107.50 price. This area of confluence is also noted by the 38.2% Fibonacci retracement of March’s violent trading range. USD/JPY prices nevertheless have potential to top this technical resistance level considering Fed Chair Powell might push back on NIRP speculation.
In turn, this could cause implied Fed funds rate futures to tick higher and provide a meaningful boost to the US Dollar. On the other hand, the US Dollar could take a sharp tumble if Powell takes a softer approach and leaves the door open for the FOMC to slash the target Fed funds rate into negative territory.
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-- Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
