USD/JPY traders await the Fed and tariff news, US dollar on thin-ice

• USD/JPY is a major focus at this critical time in markets.
• US CPI has been brushed aside as traders await the Fed and tariff announcements from Trump.

USD/JPY has been testing the trendline resistance, capped by the 50 4-hour moving average, as traders get set for the Federal Reserve interest rate decision on the horizon, with the rate announcement at 20:00 CET. Currently, the price of the yen sits in the 108.60s between 108.63 and 108.85 vs the greenback.

Firstly, it's starting to hot-up into the closing session for this week. We had the November Consumer Price Index print which surprised slightly to the upside, driven by higher electricity prices. Core inflation was in line with expectations. However, while inflation has been a factor in the Fed's reasoning behind its easier stance this year, these are clearly not going to be something which the Fed will need to consider ahead of their announcements for today. Underlying US inflation trends continue to look firmly locked in around the Fed's 2% objective.

Fed's dots to show Fed on hold until spring 2020

Instead, the Fed is expected to hold after three cuts in a row, (target range 1.50‑1.75%). The projections for next year will be what markets will focus on amidst domestic and geopolitical risks. Indeed, while US recession fears have eased after strong job reports lately, there are still soft patches in trade and manufacturing on a global scale. 

On the projections, "given the Fed has cut one more time than it thought in September, it will automatically be lowered but we think the Fed will signal it is on hold also next year. Markets are pricing in another cut during 2020," analysts at Danske Bank argued, with their base case being that the Fed may deliver a fourth cut sometime in the spring.

On such a scenario, the US dollar would expected to attract some demand if the Fed affirms its wait-and-see stance. It is worth noting that the DXY index is treading on thin ice at this juncture, testing the mid-2018 summer channel-support line and living dangerously below the 200-day moving average – US dollar bulls need a positive outcome from today's meeting. 

Trade wars to keep yen in play

Elsewhere, the clock is ticking as we close in on the deadline on the so-called, 'phase- one' deal and/or tariff delay by the 15th of December.  We are expecting an announcement from US President Donald Trump to come before the weekend's deadline and he is sure to not want to rick the apple-cart by announcing market bearish news during the NYSE trading hours so close into year-end and bearing in mind his 2020 Presidential election campaign.

News yesterday that tariffs would be delayed caused a short bout of risk-on in the markets, but the news was unconfirmed and Trump's closest advisers say the decision is ultimately up to the president. The markets have heard enough sweet-talk and will likely pounce on provocation from either side of the negotiations. Beijing had warned that they will retaliate. The yen will be a major beneficiary to such antagonistic headlines. The market's consensus is that Trump will postpone the tariffs, presuming a rational approach – but Trump has proven in the past not to be so discernible, so the least path of resistance is clearly to the downside in such a scenario, far more so than if tariffs are delayed as already partly priced in. 

USD/JPY levels