USD/JPY Fundamental Daily Forecast – Rate Decision, ‘Dot Plot’ Forecast – Ingredients for Heightened Volatility

The Dollar/Yen is inching higher on Wednesday ahead of the U.S. Federal Reserve’s interest rate and monetary policy decisions at 18:00 GMT and the Bank of Japan’s announcements early Thursday. The Forex pair is trading inside yesterday’s range on well-below average volume, indicating investor indecision and impending volatility.

Today’s Fed decision could produce a wicked two-sided trade because there is a little uncertainty ahead of the announcements. The Fed is widely expected to cut its benchmark interest rate 25-basis points. This news has been priced into the financial markets for weeks. The Fed’s monetary policy statement, however, is up in the air.

At 09:25 GMT, the USD/JPY is trading 108.211, up 0.094 or +0.09%.

Traders are being cautious because they don’t know if the Fed is going to signal future rate cuts with conviction. Traders have priced in four rate cuts this year with the next two coming in October or December. Given the improving inflation picture, solid jobs market, and the easing of trade tensions between the United States and China, the Fed may hint that the September rate cut is the last of the year or it may suggest there will only be one more.

“He’ll underwhelm everyone and not overwhelm anyone,” said Diane Swonk, chief economist at Grant Thornton. She expects a cut of 25 basis points, taking the fed funds target rate range to 1.75 to 2.0%, following the last quarter point cut on July 31.

“He won’t promise anything more. He’ll keep his cards close to his chest. He’ll be an artful dodger again,” said Swonk.

After the Fed releases its policy decision, traders will turn to the Bank of Japan’s meeting ending on Thursday to see if it follows its global peers by easing policy.

Deepening negative rates will be the key option if the BOJ were to ease, although the central bank may accompany that with measures to mitigate the pain on financial institutions, sources have told Reuters.

Daily Forecast

Look for enhanced volatility with the release of the Fed announcements. Firstly, there will be a reaction to the interest rate decision. Although a rate cut is expected, there are still enough traders on the sidelines to produce a wicked reaction.

Secondly, look for volatility after the Fed reveals its forecasts on the “dot plot” charts. The markets are currently indicating two more rate cuts, but economists said it’s unlikely the Fed forecast will include more than one more rate cut in its outlook for this year.

Be prepared for a wicked two-sided swing in the USD/JPY. Key support is 107.463. This level has to hold as support, or the Dollar/Yen could plunge.