USDJPY: Will Fed-Fueled Fire Force a Break of 107.40?

Let’s get ready to RUMMMBBBBLE! Traders skipped out of bed this morning, giddy for the latest update from the world’s most powerful central bank. As my colleague Kathleen Brooks discussed in detail yesterday, much of the market’s reaction will hinge on whether the Fed removes the phrase “considerable time” (until a rate hike) from its wording, but traders should also keep an eye out for any further details on the central bank’s exit strategy and the members’ interest rate expectations for 2017 (the so-called “dot plot”).

There is considerable uncertainty heading into this event, with USD-bullish traders pointing to a recent San Francisco Fed paper that suggested that the Fed could raise rates more quickly than market expectations, while USD bears favor “Fed Whisperer” Jon Hilsenrath’s narrative that the central bank will leave the “considerable time” phrase in its statement.

Regardless of the outcome, USDJPY is likely to see substantial volatility. After surging to a new 6-year high above 107.00 last week, rates have consolidated in a tight 55-pip range for the last four days. From a technical perspective, this price action has created a bullish flag pattern on the 4hr chart. Despite its name, this pattern is only seen as a bullish if we see a breakout above the top of the flag, in this case at 107.40. As we go to press, the MACD is still holding above its “0” level, suggesting that the medium-term momentum is still modestly bullish, though that could easily change on a dime.

With the current technical setup, conservative traders may want to consider waiting for a breakout in the wake of today’s Fed meeting before trading either way. If the Fed comes off as hawkish, a bullish breakout and potential rally toward 108.00 would be favored. On the other hand, USDJPY is overbought on longer-term timeframes, so any disappointment from the Fed could quickly take rates back down toward 106.00 or previous-resistance-turned-support at 105.45; 20-day MA support also comes in around this same level. The longer-term uptrend will remain intact as long as the 105.45 floor holds.