20.03.2023 08:00 PM
USD/JPY. The yen follows the dollar: the dollar sets the tone for trading

The USD/JPY pair updated its five-week low today (reaching 130.50) but subsequently returned to its former position, the opening price. The US dollar's strength/weakness is what causes the upward/downward dynamics; in fact, the pair moves in the same direction as the US dollar index. The dynamics of several pairs involving the Japanese currency, such as GBP/JPY, show that the yen lacks its justifications for strengthening. Hence, any price changes in the dollar/yen pair are mostly related to changes in the value of the dollar. The USD/JPY volatility today is hardly an exception.

The Fed is the main topic

All of the attention of dollar pair traders is now focused on the Fed's March meeting, the outcomes of which will be announced the day after tomorrow, on Wednesday. There is no market consensus on the likely outcomes of this meeting. For instance, according to the CME FedWatch Tool this morning, the likelihood of a 25-point rate increase is only 55%, while the likelihood of the status quo is 45%. The likelihood of executing a 25-point scenario grew to 70% at the start of the US trading session on Monday. Yet, the likelihood of maintaining the rate at its current level is still quite significant (30%).

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Moreover, Reuters journalists released their customary survey on the day of the March meeting, in which 76 out of 82 analysts predicted a 25 basis point increase in the discount rate. One economist projected that the rate will be lowered in light of recent developments in the US banking system, while five economists said that the Fed will take a wait-and-see approach. The majority of survey respondents also stated that the Fed is likely to raise the rate by another 25 basis points "at one of the meetings in the second quarter" to end the current cycle of tightening monetary policy at 5.25%.

In my judgment, the American regulator will raise the rate by 25 basis points but will reduce its rhetoric on further PEPP tightening prospects. Let me remind you that Jerome Powell permitted the rate increase to speed just before the collapse of SVB Bank. Also, he made it clear that the current interest rate hike cycle's upper bound will be moved upward. The Central Bank will not risk voicing such theses in light of the outcomes of the March conference. Also, current affairs may have an impact on the Fed members' "hawkishness" when it comes to the creation of a point forecast.

At the same time, it is unlikely that the Fed will refrain from raising interest rates in March: a pause would be a bad enough alarm signal under the conditions. The market will immediately take such a move in two ways: first, the Central Bank is willing to give up its objective of bringing inflation down to a target level of two percent; and second, the Central Bank is extremely anxious about the effects of further interest rate hikes.

The majority of market investors are certain that the Fed will continue to take a hawkish stance while keeping the pace at 25 points. On the other hand, the rhetorical tone of the supporting statement will be influenced by recent events.

Let me remind you that, according to The Wall Street Journal, nearly 200 US institutions could suffer the same fate as Silicon Valley Bank in the near future. According to economists surveyed by the Wall Street Journal, the SVB failed as a result of a fall in asset value and an increase in lending interest rates. Clients with uninsured deposits started making large-scale withdrawals, which brought about bankruptcy. According to The Wall Street Journal, 186 US banks may experience a similar scenario: if uninsured depositors withdraw their money, insured depositors may experience depreciation since the institutions won't have enough assets to cover their obligations.

Such background information puts pressure on the dollar, particularly on the eve of the Fed meeting.

Technically speaking, the USD/JPY pair on the D1 timeframe is situated on the lower line of the Bollinger Bands indicator and within the Kumo cloud. Despite the downward trend, the price was unable to pass through the 130.50 support level. First of all, the failure to establish a foothold in the area of the 130th figure shows that it is currently impractical to consider short positions. The initial southern impulse has diminished, and sellers need a strong price breakthrough to go through the 130.50 level of support. This will enable them to focus on the 129th price level in addition to gaining a foothold within the 130th figure. Consequently, it is currently advised to either adopt a wait-and-see stance for the USD/JPY pair or think about going long. Given the "Fed factor," the second choice seems to be more dangerous.

Irina Manzenko,
Chuyên gia phân tích của InstaForex
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