USD/JPY: Awaiting the FOMC but fresh catalysts are required to flip that script

One will expect the outcome of this week's FOMC meeting to clarify a stance of patience at the Federal Reserve while an early shift in balance sheet reduction should weigh on the greenback and US rates. US data of late has not been abundant, but what we have seen is rather benign economic activity, as a whole, so the meeting will most likely reflect on a poor global economic backdrop and geopolitical risks, such as Brexit and the current hiatus in Sino/US trade talks. 

FOMC outlook

"We expect the dot plot from the March FOMC meeting to be a key focus of the attention. We look for the median dots to decline in each of the next three years, but not all the way to zero for 2019," analysts at TD Securities argued. "We also expect the Fed to give more information about the desired equilibrium supply of reserves, and to state that the balance sheet runoff will end later this year."

On the market's reaction, the analysts argue that "only a significant deviation from the script would create a strong reaction in Treasuries as modest dovishness is already priced. The hurdle to generate an outsized reaction in FX is rather high. With the world mired in a growth slowdown and awaiting a pick-up, we see limits to sustained USD weakness. Fresh catalysts are required to flip that script."

• Additional risks this week are the BoJ minutes as well as Japanese CPI and Nikkei PMI.

USD/JPY levels

Analysts at Commerzbank explained that USD/JPY is neutralising near term:

"It is likely that we will have to allow for a deeper retracement to the 55-day ma and the 2-month uptrend at 110.11/110.18, which should hold for an upside bias to be preserved. Immediate resistance is 112.23, the 6 th December low, the 112.43 55 quarter moving average and recent high at 113.71. We have a 5 month resistance line also at 113.06."