USD/JPY: Yen Steadies After Rough Week, BOJ Rate Decision Ahead

USD/JPY has posted slight losses in the Monday session. Currently, the pair is trading at 117.50. On the release front, it’s a slow start to the trading week. The sole US release is Flash Services PMI, with the index expected to rise to 55.5 points. On Tuesday, the Bank of Japan will set interest rates, with no change expected to the current level of -0.10%.

The Federal Reserve rate hike of a quarter percent to 0.50% was widely expected and priced in by the markets at close to 100%. Still, the sheer magnitude of the move triggered a sharp rise by the dollar against most major currencies. The Japanese yen slipped as much as 2.8% in the aftermath of the rate hike, as USD/JPY climbed close to the 119 line in the Thursday session. However the yen has since shown some improvement.

Federal Reserve Chair Janet Yellen has worked hard at improving transparency with the markets and the Fed deserves full marks for getting out the message of a December rate hike. This marked the first rise since December 2015 and only the second rate hike since 2008. In its rate statement, the Fed sounded positive about the economy, noting that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year“. As well, the Fed revised upwards its forecast of US economic growth to 1.9% in 2016 and 2.1% in 2017, slightly higher than the Fed’s September estimates. What’s next for the Fed? In September, Fed officials said they expected two rate hikes in 2017, but the Fed is now projecting three or even four hikes next year. However, projections can change based on economic conditions, and the markets haven’t forgotten that after the hike in December 2015, the Fed said it expected to raise rates four times in 2015, but ended up raising rates only once. As well, the wild card of Donald Trump could also play a critical role in monetary policy. Trump’s economic platform remains sketchy, apart from declarations that he will increase government spending and cut taxes. If Trump’s economic policies heat up the economy and boost inflation, we could see a number of rate hikes in 2017.

Last week, Japan released the Tankan indices, key indicators which gauge activity in the manufacturing and non-manufacturing sectors. The Tankan Manufacturing Index improved from 6 to 10 points, matching the forecast. The Non-Manufacturing Index remained unchanged at 18 points, just below the forecast of 19 points. These figures point to optimism among large manufacturing and non-manufacturing sectors. Still, the economy continues to struggle and the BoJ is not expected to surprise the markets with any monetary moves.

USD/JPY Fundamentals

Monday (December 19)

  • 14:45 US Flash Services PMI. Estimate 55.2

Tuesday (December 18)

  • Tentative – BoJ Policy Rate. Estimate -0.10%
  • Tentative – Monetary Policy Statement
  • Tentative – BoJ Press Conference

*All release times are EST

*Key events are in bold

USD/JPY for Monday, December 19, 2016

USD/JPY Dec 18 to Dec 20, 2016

USD/JPY December 19 at 5:55 EST

Open: 117.80 High: 117.84 Low: 116.95 Close: 117.40

USD/JPY Technical

  • USD/JPY posted losses in the Asian session and has edged higher in European trade
  • 116.88 is providing support
  • 118.05 is the next resistance line
  • Current range: 116.88 to 118.05

Further levels in both directions:

  • Below: 116.88, 115.88 and 114.83
  • Above: 118.05, 118.85 and 119.83

OANDA’s Open Positions Ratio

USD/JPY ratio is almost unchanged in the Monday session. Currently, long positions have a majority (56%). This is indicative of trader bias towards USD/JPY continuing to head to lower ground.

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