USD/JPY traders in Tokyo move out of the greenback ahead of FOMC; Post Fed risk to target 200 DMA
- USD/JPY spiked down in Tokyo as traders get out of positions aheda of the FOMC.
- Currently, USD/JPY is trading at 112.26, dropping from a high of 112.55.
Despite a soft dollar overnight, with a feeble positive close in the US indices that had otherwise been a lot lower on the session, USD/JPY held the 112.21/25 prior December lows with NY's 112.25 low on Tuesday as investors get set for the December FOMC meeting as possible the final fireworks for the year, until the New Years Eve display.
The US dollar has slipped below the 97 handle after a turbulent day across the European and US sessions and US yields are extending their declines, leaving the US/JPY spread in favour of the downside. However, they are still holding above the 2.8% mark in Tokyo. In New York, the US 10yr treasury yield fell from 2.85% to 2.82%, while the 2yr yield fell from 2.68% to 2.65%, a low since early September.
- Federal Reserve Preview: Slowdown ahead
As per the Fed funds rate futures, these continued to price a rate rise for today at around a 70% chance but the yields for 2019 fell sharply, now only about 50% priced for a hike next year. Accompanied by a 10bp of easing priced in for 2020 is creating a huge gap between the Fed Sept average dot plots of 3 hikes in 2019 and one in 2020 sparking a sell-off in the greenback in Asia today as Tokyo traders get on board the offer and given WTIs drop, some even doubt that we will see a hike tomorrow. If we do, its whether the Fed will be making policy even more data dependent. If we do see a decline in the 2019 median dot to two hikes from three or even down to just one, in line with the street, that will be a huge weight on the dollar; Either way, if the Fed does price in two hikes next year, that could be adverse for markets and see the yen rise vs the greenback on risk aversion - (The Fed is expected to raise the target range for Fed funds to 2.25%-2.50%).
USD/JPY levels
- Support levels: 112.20 111.90 111.60
- Resistance levels: 112.75 113.00 113.35
Traders will look to see if the pair can break below the 112 handle on the Fed. If so, that opens prospects to challenge the 200-DMA at 110.83.
Valeria Bednarik, Chief Analyst at FXStreet explained that the pair has bounced several times from the 112.20/30 price zone these last couple of months, making of the level a more relevant support that if broken, could result in a steeper decline:
"In the 4 hours chart, the pair remains well below its 100 and 200 SMA which gain modest downward strength well above the current level, as technical indicators maintain their bearish strength near oversold readings."