USDJPY: "Fed" Up With Consolidation at 108.00

It’s been a quiet start to the forex trading week across the board, and no pair shows that phenomenon more than USDJPY. After gapping above 108.30 to start the week, the pair has dropped back down to consolidate around the 108.00 handle for the last three days. Short-term traders are no doubt frustrated with the lack of volatility thus far, but one way or another, market movement is likely to pick up with the release of the Federal Reserve’s monetary policy decision and statement at 14:00 ET (18:00 GMT) today.

The central bank is widely expected to taper the final $15B of monthly asset purchases in its meeting, though the statement is sure to emphasize that actual interest rate rises are still a long ways off. The big factor for traders will be the central bank’s assessment of the current and future trajectory of the US economy; if Fed members remain concerned with Europe’s slowing economy and the rising dollar, they could strike a more accomodative tone and the dollar could fall as a result, while a more upbeat assessment could raise expectations that the Fed may be the next major central bank to raise interest rates midway through next year. Traders will also keep a close eye on the cohesiveness of the FOMC: with Fed Presidents Plosser and Fisher already dissenting to recent decisions, another dissenter (perhaps the new head of the Cleveland Fed, Loretta Mester) would show growing fractures within the policymaking body and could drive the dollar higher.

Technical View: USDJPY

So what could today’s Fed meeting mean for USDJPY? On a technical basis, rates have become increasingly compressed between a rock (the 61.8% Fibonacci retracement at 108.20) and a hard place (the bullish trend line off the mid-October low near 105.00). Almost certainly, one of these barriers will break within the next couple of hours, clearing the way for the next 100-pip move in USDJPY. Both the RSI and MACD are showing balanced, two-way trade for now, so the best course of action may be to wait until after the statement’s release for a clear trading bias.

If we see the Fed strike a very cautious, accomodative tone (our base case scenario), USDJPY may drop below short-term bullish trend line support to target the 50-day MA (300-period MA on the 4hr chart) around 107.00 next. On the other hand, a more hawkish, upbeat statement could finally lead to a conclusive break of the 108.20 barrier, exposing 109.00 (the 78.6% Fib retracement) or 110.00 (key previous/psychological resistance) later this week.