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USD/JPY Rebounds Ahead of FOMC, BOJ Unchanged with Bleak Outlook

USD/JPY Rebounds Ahead of FOMC, BOJ Unchanged with Bleak Outlook

Key Talking Points:

  • USD/JPY faces conflicting fundamental drivers
  • BoJ warns about the economic outlook
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Another week has passed keeping an eye on the USD/JPY trade and the pair is exactly where it was this time last week. The corrective pullback still seems to be in play but the drop below 109.00 has been in the works for too long now, which is a sign of concern for bears.

Fundamentally, there has been a lot going on over the last few days and weeks. Starting with the resignation of Japanese PM Suga a few weeks back, which led to promises from new candidates of stimulus in the economy, boosting onshore stocks and weakening the Yen. Then the story about Evergrande’s demise picked up prominence and caused market-wise jitters at the beginning of this week, increasing safe-haven demand and actually benefiting the JPY over the USD.

Overnight we’ve had the Bank of Japan reporting a bleaker view of economic output as it kept its monetary policy steady, a sign that the bank will hold steady as it watches other banks withdraw their crisis-induced stimulus, especially as Japan’s CPI is still way below the 2% target. They highlighted that supply constraints had weakened factory output and exports at the same time that demand remains subdued, a narrative which hasn’t been helping the Yen into the European session, with USD/JPY up 0.25% this morning.

Later this evening focus will be on the Federal Reserve as they conclude their two-day meeting, with many investors eager to see the bank’s updated dot-plot on interest rates. Powell has been pretty consistent with calming down hawkish expectations over the last few months and I wouldn’t expect this meeting to be any different, but markets are positioned for a taper announcement and a rise in dot-plot projections.

The key question is whether the Evergrande situation will have influenced the Fed’s decision at all. This could be a perfect excuse for the central bank to hold off a taper announcement until November, although the positioning of the USD heading into the meeting suggests markets are still expecting a hawkish tilt from the Fed.

USD/JPY Daily chart

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USD/JPY seems to have found an area of short-term support at 109.117 which has halted the pullback in three occasions since mid-August. Coincidentally, this level is now in convergence with the 200-day SMA, which is bringing more attention to the area. It will now be critical for the pair to remain above 109.120 as this would be the first time USD/JPY drops below its 200-day SMA since February, a sign of further bearish momentum to come. If so, 108.60/50 remains a good target area. Alternatively, a break above 110.00 would likely signal the resumption of the bullish trend.

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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

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