FOMC meeting preview: USD/JPY in focus as Powell holds fire
Matt Weller, CFA, CMT January 26, 2021 11:46 PM
When it comes to the FX market, the Fed will always have its biggest influence on the US dollar...
More than a year on from the first (reported) COVID-19 case in the US, the world’s largest economy remains on thin ice. Despite optimism around multiple highly-effective vaccines, initial unemployment claims have ticked up in recent weeks, and countless businesses are struggling to hold on amidst government-mandated shutdowns until the economy can start to “return to normal” in the second half of the year.
Against this backdrop, the Federal Reserve’s decision is clear: Continue to offer maximum stimulus, with large ongoing asset purchases and interest rates at 0%. Previous hints of tapering asset purchases (“quantitative easing”) have been walked back in recent days, with officials opting indicating that they’d like to see “substantial further progress” toward the central bank’s dual mandate, 2% average inflation and maximum employment.
In terms of changes for this year, it is notable that Christopher Waller, who was sworn in by the Board of Governors last month, will vote in his first FOMC meeting this year. Between Waller and the normal yearly rotation between regional Fed Presidents, the 2021 voters are on track to have a slightly more dovish tilt this year, though it’s unlikely that the central bank would be tightening policy meaningfully this year regardless.
Following the December release of the Fed’s Summary of Economic Projections (SEP), the policymaking body will not be releasing updated economic forecasts until March. This means that traders will key in on Fed Chairman Jerome Powell’s press conference more than usual, with the Chairman likely to voice support for expanded fiscal stimulus and emphasize the downside risks to the near-term economic outlook, even if he remains cautiously optimistic over the longer-term prospects.
Market to watch: USD/JPY
When it comes to the FX market, the Fed will always have its biggest influence on the US dollar. Though no meaningful changes are expected to monetary policy for months, the central bank’s economic outlook for the year, along with any details on how Powell and company intend to eventually wind down the current unprecedented stimulus, could lead to short-term volatility in the US dollar.
Looking at the USD/JPY pairing, rates remain in a clear bearish channel dating back to Q2 2020. More recently, the pair has spent the last two weeks consolidating in the upper-103.00s after the early January spike. With the bearish channel intact and longer-term moving averages capping prices of late, the path of least resistance for USD/JPY remains to the downside. A break of last week’s low near 103.35 could clear the way for the unit to retest its post-pandemic low around 102.60 heading into February:
Source: TradingView, GAIN Capital
Meanwhile, a bullish breakout above 104.40 would be needed to erase the bearish bias; such a move would be seen as stronger if the pair’s 14-day RSI is able to break above the 60 level which has capped every rally for the last eight months.
Learn more about forex trading opportunities.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.