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USD/JPY outlook: Fed's influence on market dynamics

USD/JPY outlook: Fed's influence on market dynamics

The USD/JPY currency pair has experienced a notable lack of decisive movement in recent trading sessions, displaying a rather subdued trajectory as it oscillates within the confines of the overhead resistance at 148.80 and the horizontal support situated at 147.40.

Despite this apparent indecision, market participants are gearing up for what could be a tumultuous week, with the impending Federal Reserve decision expected to inject a heightened sense of volatility into financial markets.

Turning attention to the much-anticipated Fed announcement, prevailing expectations suggest that there won't be any immediate alterations to the existing monetary policy during the January meeting. However, the focal point lies in the potential removal of the tightening bias from the post-meeting statement. This move could signify a notable shift toward a more neutral stance, spurred by the encouraging progress observed in addressing inflationary concerns.

Moreover, traders should brace themselves for the possibility of discussions revolving around the overarching criteria for rate reductions during the upcoming meeteing. Should Federal Reserve Chair Jerome Powell signal that deliberations on rate cuts have advanced, market sentiment may pivot, and the probability of a rate cut in March could be factored in with greater certainty. Such an outcome, if materialized, could exert downward pressure on the U.S. dollar, marking a bearish trajectory for USD/JPY.

Conversely, in the scenario where the central bank maintains a hawkish tone, expressing reservations about the potential resurgence of inflationary pressures due to relaxed financial conditions, and refrains from signaling an imminent rate cut, financial markets may witness an uptick in yields. This, in turn, would likely provide support for the USD/JPY currency pair.

In the aftermath of a recent sell-off, USD/JPY managed to find a foothold at the crucial support level of 147.40, aligning with the 100-day simple moving average. If the prevailing upward momentum persists in the upcoming trading sessions, the currency pair may encounter resistance at the levels of 148.80 and 149.00. Further strengthening could capture market attention, particularly with the psychological threshold of 150.00 looming on the horizon.

Conversely, in the event of a bearish reversal, the initial and pivotal support level to monitor closely is situated at 147.40, as mentioned previously. While breaching this level might pose a challenge for the bearish camp, a successful breakdown could pave the way for a retracement towards the levels of 146.00, followed by 145.50. Traders are advised to exercise vigilant monitoring of these key levels, as they hold the potential to signal significant shifts in market dynamics and trade sentiment.

USD/JPY, daily chart, MetaTrader, 27.01.2024


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