USD/JPY – Yen Under Pressure Ahead of Fed Policy Statement

USD/JPY has posted strong gains on Wednesday, trading at 113.60 in the European session. On the release front, it’s a busy day in the US, highlighted by the Federal Reserve rate announcement and policy statement. The US will also release CPI and Building Permits reports. In Japan, there is one minor event on the calendar, Trade Balance. On Thursday, there are two key events in the US – Building Permits and the Philly Fed Manufacturing Index.

With the Japanese economy struggling, pressure has been building on the BoJ to adopt further easing steps. However, the central bank did not make any changes to monetary policy on Tuesday, but sounded pessimistic about the economy and warned that weak inflation will continue. The BoJ maintained its aggressive base money target of JPY 80 trillion and a 0.1 percent negative interest rate on some reserves held by the central bank. BoJ Governor Haruhiko Kuroda noted that exports and output are down due to slowing growth in emerging economies. The BoJ surprised the markets in December when it adopted negative rates, but the markets and the public have soured on the move, which has failed to lift inflation or weaken the Japanese currency. Further easing measures will likely be revisited in April, with many experts expecting the BoJ to expand monetary stimulus next month.

The Federal Reserve will be on center stage on Wednesday, as the Fed will set interest rates and issue a policy statement. Most experts are expecting the Fed to remain on the sidelines and not raise rates, given current economic conditions. Although the US economy continues to expand, growth has been softer in 2016 compared to the red-hot pace which marked the economy in the second half of 2015. The primary trouble spot in the economy is the inflation picture, as inflation levels remains very low, a result of weak global demand and low oil prices. Fed policymakers are divided on how to respond to persistently low inflation. Some FOMC members favor preempting inflation with a rate hike, while others feel that the economy is currently too fragile for such a move.

The markets are not anticipating any rate move at the upcoming meeting, but there is intense interest in the Fed’s “dot plot” (a chart of rate hike expectations released each quarter). When the Fed raised interest rates in December, the dot plot called for four hikes in 2016 and projected rates would be between 1.25% and 1.50% by the end of 2016. Many experts have argued that the dot plot is not in sync with market projections of rate increases, and the December dot plot releases appears to bolster their argument. With the cooling off of the US economy early in 2016, the March dot plot is likely to project two or three rate moves in 2016, but many market players see the Fed opting not to raise rates again until next year.

USD/JPY Fundamentals

Wednesday (March 16)

• 8:30 US Building Permits. Estimate 1.20M
• 8:30 US Core CPI. Estimate 0.2%
• 8:30 US Housing Starts. Estimate 1.15M. Actual 1.18M
• 9:15 US Capacity Utilization Rate. Estimate 76.9%. Actual 76.7%
• 9:15 US Industrial Production. Estimate -0.2%. Actual -0.5%
• 10:30 US Crude Oil Inventories. Estimate 2.9M. Actual 1.3M
• 14:00 US Crude Oil Inventories
• 14:00 FOMC Statement
• 14:00 FOMC Economic Projections
• 14:00 FOMC Statement
• 14:00 FOMC Federal Funds Rate
• 14:30 FOMC Press Conference
• 19:50 Japanese Trade Balance. Estimate 0.24T

Thursday (March 17)

• 8:30 US Philly Fed Manufacturing Index. Estimate -1.4
• 8:30 US Unemployment Claims. Estimate 267K

*Key releases are highlighted in bold

*All release times are DST

USD/JPY for Wednesday, March 16, 2016

USD/JPY March 16 at 7:30 DST

Open: 113.10 Low: 113.02 High: 113.75 Close: 113.57

USD/JPY Technical

• USD/JPY has posted slight losses in the Asian and European sessions
• 113.86 is under pressure as resistance, as USD/JPY has moved higher
• 112.48 is providing support
• Current range: 112.48 to 113.86

Further levels in both directions:

• Below: 112.48, 111.50, 109.87, and 108.37
• Above: 113.86, 114.65, 115.85 and 116.65

OANDA’s Open Positions Ratio

USD/JPY ratio has shown movement towards long positions, which retain a strong majority (66%), indicative of strong trader bias towards the pair continuing to move to higher levels.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.