USD/JPY gaps down -0.5% in the Asian open on risk-off flows

• Risk appetite is diminished following the attack on Saudi Arabia.
• USD/JPY gapped down to 107.44 on Monday’s open with Fed next in focus. 

USD/JPY gapped down to 107.44 on Monday’s open as risk appetite is diminished following the attack on Saudi Arabia. USD/JPY is currently trading at 107.60 having ranged between 107.44 and 107.91, falling over 0.5%. Saudi Arabia suffered a drone attack on Saturday on the world’s largest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais that saw more than 50% of crude and natural gas production taken offline, representing more than 5% of global crude production.

"The reaction from Pompeo over the weekend means that markets were clearly not correctly priced for geopolitical risks. As such, it is likely that we see markets move to price a risk premium into markets,"

Yields will play a key role in the price of USD/JPY while the US 2-year Treasury yields climbed from 1.71% to 1.80% on Friday, while the 10-year rose from 1.80% to 1.90%. With the Federal Reserve in mind for this wek, markets are pricing 23bp of easing at the 19 September Fed meeting, and a terminal rate of 1.29% (Fed funds rate currently 2.13%).

Fed in focus

However, there is the risk of a deeper cut and St. Louis Fed President James Bullard recently argued in favor of a 50-basis point cut. "There is indeed an argument to be made in favour of such a policy path. Trade uncertainties are still very much an issue and, judging from the latest ISM report, factory conditions are now deteriorating," analysts at NBF Economics and Strategy explained.

On the other hand, analysts at TD Securities expect just a 25bp again and the Fed to leave the door open to further easing. "The dot plot should reflect a number of FOMC voters projecting 75bp of total easing for this year, but not enough to move the median lower to that level. Presidents George and Rosengren should dissent again at the meeting."

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet, explained that USD/JPY, in the daily chart, has reached a bearish 100 DMA, trading around it for the first time in four months:

Technical indicators in the mentioned chart have eased just modestly from overbought readings, far from suggesting upward exhaustion. Furthermore, the pair has extended its advance above the 61.8% retracement of its August decline at 107.45. In the 4 hours chart, the pair remains above a bullish 20 SMA, which continues advancing beyond the larger ones. Technical indicators, however, are easing within positive ground, not enough to indicate a bearish divergence, but giving a warning sign. The key is the weekly high at 108.25, as an advance beyond it should lead to additional gains toward the August high as 109.31.