The dollar-yen tandem may both take a hit with Trump's remarks and the Fed's impending decision.
The US dollar is currently being pressured by high volatility as the markets remain further fazed by the stance President Trump is taking towards the currency market and as the market nervously await the Fed’s decision.
The USD/JPY has been on a bumpy ride for the past few sessions as it bounced back and forth to different sentiments provided by the Fed and Trump himself. Just recently, the newly inaugurated US leader remarked that the yen has been overvalued which caused the pair to go through some major losses. Still, what’s causing more worries is the fact that President Trump may execute orders without consent from the other party which may further cause detrimental effects on the current valuation of the Japanese yen. A close observation of the political developments that are sure to ensue in the coming weeks is being done by the market as uncertainty further looms.
Consistent price swings have been recorded on the major pair between the low of 112.50 and the fleeting high around 115.37, as a sideways channel has been sought by the pair. A potential reversal can be seen with the pair’s movements given some technical factors that interestingly affect it.
The USD/JPY finds its immediate resistance currently resting at a 10-day SMA of 113.77. Breaking above its previous, the greenback-yen tandem could test its 5-day SMA of 113.91 and its 20-day SMA of 114.17 while the underside sees its immediate support sitting at 113 next at its daily low of 112.63 and even further below that at its 9-week low of 112.08.
After a bearish trade for seven consecutive sessions which began on January 9 and ended January 17, the major has bounced back and forth into the red and green territories for 11 sessions now and has last settled at 113.34. The pair’s relative strength index (14-day) is currently situated at 44.73, trending lower towards the oversold level.
However, with the past movements of the currency pair as basis, this movement towards the oversold territory could be a signal for retracement which indicates that a bounce is likely to happen in the near term.
Fed’s Announcement can Change the Game
Later in the day, the US Federal Reserve is scheduled to announce the current fiscal year’s first monetary policy. Although a rate hike is not expected at the moment, market watchers anticipate what the central bank has to say further, which will give them a more solid ground from which to see where the market might be heading. Investors would also like to be reassured that the rates will move a higher once more within the year.
However, if the Federal Open Market Committee’s sentiments would show a small sliver of a cause for greater worry, this would most likely aggravate the current downbeat outlook of the dollar and might cause the currency’s crash. It is highly plausible that the USD/JPY pair would anchor its movement on a less hawkish Fed statement than otherwise.
Conclusion
Barclays senior Forex strategist Shin Kadota said,
It is becoming clear that the Trump administration is one that will pursue a weaker dollar and criticise the currency policies of others. Under such conditions, U.S. yields and the dollar are losing their correlation. Any rise in yields resulting from monetary policy expectations will no longer be able to support the dollar as much.
As Trump steals much of the spotlight recently, the US Federal Reserve's policy decision to be released later in the day was pushed to the sidelines. A highly volatile dollar is more likely to be seen in the sessions to come and a steady movement might not yet be seen in the near term.