USD/JPY finds stability near 132.50, as market eagerly awaits the Fed’s decision

• USD/JPY gains ground as the rising US Treasury yields boost the currency pair.
• FOMC meeting takes center stage with markets converging on a 25 bps rate hike consensus.
• Banking development and diplomatic developments supporting USD/JPY resurgence.

USD/JPY finds some respite on rising US Treasury (UST) bond yields. U.S. Treasury Secretary, Janet Yellen, informed bankers on Tuesday that she is ready to protect depositors in smaller U.S. banks amid contagion concerns.

The strong commitment from US officials has ignited a positive risk appetite, leading Wall Street to close Tuesday on a positive note. UST yields experienced a strong bounce as investors moved away from bonds and into riskier assets.

Tuesday's upbeat sentiment received additional support from a meeting between Chinese President Xi and Russian President Putin. The latter suggested that Chinese proposals could form the basis of a peace settlement but noted that the West and Kyiv still needed to prepare.

Investors' attention has now shifted to the FOMC meeting on Wednesday, as volatility subsided due to increased stability in the banking sector. Markets are pricing in an 85% chance of a 25 basis point (bps) rate hike from the Federal Reserve (Fed).

Despite the ongoing banking turmoil, the market is finding consensus for a 25 bps rate hike, following the argument that liquidity injections and rate hikes can occur simultaneously.

The US Treasury will likely take measures to support deposit guarantees, despite opposition from some senators. However, such a support plan must first pass through the parliamentary process.

Given that the summary of projections for the upcoming Fed meeting was conducted before the banking turmoil, the focus will shift to the accompanying statement and dot plots. The most crucial aspect will likely be the opening remark during Fed Chair Powell's press conference and his assessment of the ongoing banking crisis.

Any indication of a pause in rate hikes is expected to be positive for risk assets.

Levels to watch