- USD/JPY hovers near the 131.00 level ahead of a crucial Fed decision.
- US Dollar is under pressure amid struggling global banking sector and excess liquidity.
- Investors brace for potential volatility as the market anticipates for 25 bps rate hike from Fed.
USD/JPY hovers around the 131.00 mark during Tuesday's Asian session, maintaining its bearish bias.
Although US Treasury (UST) bond yields were boosted on Monday, USD/JPY failed to capitalize significantly. This can be attributed to the struggling global banking sector, as many commercial banks faltered last week. Consequently, investors rushed to purchase UST bonds, causing yields to decline.
USD/JPY closely follows the UST yield direction, so, unsurprisingly, the US Dollar remains under pressure. Earlier this week, the Federal Reserve restarted swap lines to provide US Dollar liquidity to central banks in need, in addition to the Fed's discount window. This rapid action has flooded the market with excess US Dollar liquidity, resulting in widespread weakness.
As the market heads toward Wednesday's FOMC meeting, caution is advised. The global banking system is already strained, and a further increase in borrowing costs could exacerbate existing issues. The market anticipates a 25 basis point (bps) rate hike from the Fed.
Trading during the FOMC event requires extra caution, as this meeting differs from a typical one with pre-set expectations. With investors divided over various variables, volatility is expected. It is always recommended to be especially careful, as the market could reverse during the press conference.
It is crucial to pay attention to Fed Chair Jerome Powell's press conference, as the media will scrutinize his statements for any unexpected comments that could trigger market volatility.
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