USD/JPY Fundamental Daily Forecast – Too Many Fed Options Send Investors to Sidelines

The Dollar/Yen is trading flat on Monday, which comes as no surprise. This is typical movement in the Forex pair ahead of a major U.S. Federal Reserve announcement like the one this Wednesday. The major players are usually reluctant to take a position ahead of the meeting because this meeting is especially complex.

At 10:26 GMT, the USD/JPY is trading 111.467, down 0.001 or -0.00%.

Following its two-day meeting which begins on Tuesday, the Fed will announce its interest rate decision, it monetary policy statement and the Federal Open Market Committee will offer new economic projections. Additionally, Fed Chair Jerome Powell is scheduled to hold a news conference.

The only certainty at this month’s Fed meeting is the central bank is not expected to raise interest rates. Currently, its benchmark rate stands at 2.25 to 2.50 percent. Furthermore, the Fed is expected to stick with its mantra of “patience” on monetary policy.

The current action in the financial futures markets indicates that 100% of traders expect the Fed to stand pat on rates. More than 50% of traders expect to see at least one rate hike, while about 10% do not expect any rate hike. About 2% think the Fed could raise rates two times.

Given these numbers, traders are not likely to focus on what the Fed does in March, but rather how it stands on two, one or even zero rate hikes. This information will move the USD/JPY.

The big concern for Dollar/Yen traders is how the changes in the economy since the last Fed meeting on January 29/30 have affected Fed policymakers.

Since the economy has weakened and growth during the first quarter has slowed, some traders are betting the Fed may reduce the number of rate hikes expected from two to one. A few have gone as far as predict the central bank will refrain from raising rates at all.

So the move in the Dollar/Yen this week is likely to be determined by what the Fed says about future interest rates. Look for the USD/JPY to remain rangebound with traders responding to fresh economic news and demand for risk if the Fed stays the course.

If the Fed sees enough weakness in the economy to lower the number of rate hikes to one then look for the USD/JPY to weaken a little. However, the Forex pair could plunge sharply if central bank policymakers determine that no rate hikes is the suitable approach.