USD/JPY Fundamental Daily Forecast – “Dovish” Fed Makes Japanese Yen More Attractive Asset

The Dollar/Yen spiked higher shortly after the release of the U.S. Federal Reserve’s interest rate decision on Wednesday, but plunged into the close in reaction to the central bank’s monetary policy statement and comments from Fed Chairman Jerome Powell.

The price action helped form a potentially bearish technical chart pattern called a closing price reversal top. While this chart pattern does not indicate a change in trend, it does signal that the selling is greater than the buying at current price levels and could trigger the start of a 2 to 3 correction.

Although the Fed raised its target overnight rate by 25-basis points to a range of 2 percent to 2.25 percent, up from 1.75 percent to 2 percent, the central bank dropped the word “accommodative” from it statement in how it describes its monetary policy.

That move raised the most questions with some traders saying this likely means that the Fed no longer believes its policy is accommodative, and it’s likely closer to being done with its rate hikes. The initial price action suggested the market first interpreted the word’s removal as “the end of the Fed tightening cycle.” However, Powell said the removal of that word does not signal any change in the bank’s path toward normalizing monetary policy.

The Japanese Yen was also supported by comments from Fed Chair Powell who said he does not see a buildup in fundamental inflation and does not anticipate prices surprising to the upside.

“The main thing where we might need to move along a little bit quicker if inflation surprises to the upside. We don’t see that,” Powell told reporters during his quarterly news conference Wednesday.

Forecast

The price action on Wednesday and today’s early session follow-through suggests investors interpreted the Fed to be dovish.

Over the near-term, or perhaps even extending to its next major meeting in December, traders are likely to continue to try to interpret the meaning of the removal of the word “accommodative”. Despite what Fed Chair Powell said it means, there are some traders who believe the Fed issued a dovish statement because it dropped the word. Furthermore, they claim without accommodation, there’s no preset path of rate hikes and every decision becomes a toss-up.

This interpretation could lead to an eventual retracement of the last rally from 110.379 to 113.132. If the current sell-off begins to gain traction then look for a potential break into its retracement zone at 111.758 to 111.434. This area is currently the best downside target.

Later today, investors will get the opportunity to react to a slew of U.S. economic reports.

Major reports:  Core Durable Goods Orders are expected to have risen 0.4%. Durable Goods Orders are forecast to have risen 1.9%. Final GDP is expected to come in at 4.2%.

Minor reports include Goods Trade Balance, Preliminary Wholesale Inventories, Pending Home Sales and Weekly Unemployment Claims.