USD/JPY has dropped below the 108 handle as U.S. yields continue to fall

USD/JPY has spiked to the downside following a dovish outcome overnight from the FOMC meeting. US yields have fallen to the lowest levels since the start of Sep 2017 levels, with a reading in Tokyo as low as 2.004%; They were up at 2.098% ahead of the Fed overnight. This has sent USD/JPY to the lowest levels since early January. "The curve bull steepened significantly on a dovish Fed message. Given our revised call for 150bp of Fed eases between now and the end of 2020, we think that the 10y yield should decline further and the 5s30s curve should steepen toward 100bp by year-end," analysts at TD Securities explained.

FOMC outcome

The Federal Reserve has opted to leave monetary policy unchanged,  as expected, but has signalled to the market an easing bias by dropping language saying it would be 'patient' on future policy adjustments and that they are closely monitoring and will act as appropriate. James Bullard, the St Louis Fed President, went further and voted for an immediate 25bp rate cut. The balance sheet roll off will proceed as planned. There is now a 25bp of easing priced in for the July meeting, with a total of four cuts priced by mid-2020.

• CME FedWatch Tool shows 89% chance of a 25 bps rate cut in July

The FOMC Statement comparisons:

The FOMC meeting main takeaways:

• Interest rate on excess reserves unchanged at 2.35%.
• Benchmark interest rate unchanged; target range stands at 2.25-2.50%.
• Drops language saying it would be 'patient' on future policy adjustments.
• Uncertainties have increased regarding outlook for sustained economic expansion.
• 9:1 policy vote, Fed's Bullard dissented because he wanted a rate cut
• To act as appropriate to sustain econ. expansion with a strong labour market, inflation near target
• Economic activity is rising at a moderate rate
• Household spending appears to have picked up but business fixed investment has been soft

The Dot Plot

"The market has taken this as a signal that a July 25bp rate cut is virtually a done deal with three more to come, but we are not so sure. The path of trade talks is critical and if there are some positive messages, if not actions, and the activity data holds up, the market will be disappointed. Moreover, the “dot” diagram of forecasters has a median of NO cuts this year and only one next year," analysts at ING Bank argued.

Looking ahead...

We have the Bank of Japan today, and the decision has no fixed time but is most likely within an hour of 12:30pm Syd/11:30am Tokyo. Analysts at Westpac noted that the BoJ made no substantive changes at its 25 April meeting which included a quarterly forecast review, so expectations are low for today’s statement, despite a deterioration in US-China trade relations since the last meeting.

When is the BOJ rate decision and how could it affect USD/JPY?

USD/JPY levels

Valeria Bednarik, Chief Analyst at FXStreet noted ahead of the drop that the technical indicators head firmly lower within negative levels, at over two-week low and argues that the bearish momentum is set to accelerate now that the pair loses 107.81, this month's prior low. Analysts at Commerzbank said, "Our initial target is the 107.27 61.8% Fibonacci retracement, then the 78.6% retracement at 105.87."