Uncertainty Over Fed’s Tone has Some USD/JPY Bulls Worried

The Dollar/Yen is trading flat and inside its previous range for a third session on Tuesday, indicating investor indecision and impending volatility. Helping to create the chart pattern are concerns over the tone of tomorrow’s U.S. Federal Reserve monetary policy and interest rate decisions.

Traders are confident the Fed will raise rates by 50-basis points, but there is some debate about how aggressive the Fed can be on future rate hikes because of worries about a slowdown in the U.S. and global economies.

At 11:04 GMT, the USD/JPY is trading 130.125, down 0.055 or -0.04%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $71.88, down $0.29 or -0.40%.

Traders Waiting to Read Fed’s Tone

Besides Wednesday’s 50-basis point hike, the market is also pricing in a similar move in June and July. Additionally, traders also believe the Fed will follow-up with a series of 25-basis point rate hikes at every meeting until the end of the year.

However, last week’s report showing a contraction in first quarter U.S. GDP, combined with weaker-than-expected manufacturing reports in China and the United States, already suggest a slowdown in economic growth may already be taking place.

How the Fed responds to these issues could set the tone of its monetary policy statement, which will drive the price action in the Dollar/Yen.

Right now, the USD/JPY is being supported by the divergence between the monetary policies of the hawkish Federal Reserve and the dovish Bank of Japan. That’s not going to change. However, a less-hawkish Fed could encourage some traders to trim their bullish positions. This would trigger a short-term setback in the Forex pair.

Short-Term Outlook

The main trend is up. A trade through 131.249 will signal a resumption of the uptrend. A move through 126.945 will change the main trend to down. The pivot formed by this trading range is 129.097.

Trader reaction to 129.097 should determine the direction of the USD/JPY on Tuesday. However, volume will be the key as to whether there is a resumption of the rally or the start of a correction. It is expected to be well below average with many of the major players taking a breather ahead of Wednesday’s Federal Reserve announcements. Today may just be a good day to keep your powder dry.