The Federal Open Market Committee’s interest rate decision on Wednesday is shaping up as one of the biggest potential volatility events of the month, and USDJPY is front-and-centre for traders looking to position around interest rate differentials and forward guidance.
Markets are now pricing an 89% probability of a 25 bp Fed rate cut, a sharp shift from just a few weeks ago when expectations were sitting closer to 30%. Importantly, the data hasn’t meaningfully changed over that period. The repricing has instead come almost entirely from increasingly dovish commentary from Fed officials, crucially, some but not all, which has encouraged markets to lean heavily toward a cut.
However, bond markets are sending a different signal. US yields have pushed higher over the past week, suggesting that fixed-income traders may be questioning the degree of dovishness implied by the Fed’s rhetoric. This divergence sets the stage for potential volatility – and maybe even a rate hold??
A rate cut is still the base case, so the key market-moving catalyst is likely to come from the Dot Plot, Rate Statement, and Powell’s Press Conference.
- More dovish-than-expected guidance → USD likely to fall broadly.
- Less dovish tone (no one is expecting hikes) → USD could strengthen sharply.
USDJPY is consolidating near key technical levels and is perfectly positioned for a breakout on either side depending on the Fed’s tone.
A more dovish Fed paired with a hawkish Bank of Japan backdrop would favour interest-rate-differential shorts — opening the door to a deeper downside correction. Conversely, a less dovish Fed could be the trigger for another drive higher, putting recent highs up near 158.00 back into play and making Yen levels once again uncomfortably for the Japanese monetary authorities.
Key Technical Levels
- Resistance 2: 157.89 – November high & trendline resistance
- Resistance 1: 156.20 – December high
- Support 1: 154.73 – Trendline support
- Support 2: 154.32 – December low
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