- The US dollar experienced a slight rally during Wednesday's trading session, indicating signs of life as the market anticipates the Federal Reserve's rate decision.
- The USD/JPY currency's future direction hinges on whether the market perceives the Federal Reserve as slowing down or maintaining its aggressive tightening approach.
- It is expected that the market will remain noisy and be heavily influenced by global bond markets.
Focus on FED and Bond Market
In regard to bond markets, the Bank of Japan continues its struggle to control the yield curve. The central bank may be compelled to purchase unlimited bonds to maintain the 10 JGB at 50 basis points or less, which would involve printing yen. This scenario unfolded last year, making it a moving target to keep an eye on. If rates spike following the Federal Reserve's decision, a knock-on effect could be felt worldwide, including in Japan.
The 50-Day EMA and the 200-Day EMA are positioned just below the ¥134 level, both exhibiting a flat trajectory, suggesting the market is currently range-bound. Above this point, the ¥135 level represents a more substantial resistance barrier. Meanwhile, the ¥130 level serves as significant support based on previous market activity.
It is worth noting that the market rebounded from the critical 50% Fibonacci retracement level of last year's significant move, forming a double bottom around the ¥128 level. This market is expected to remain noisy and choppy, making it challenging to take large positions. However, more clarity may emerge after the Federal Reserve's press conference on Wednesday. Until then, the market is likely to experience turbulence as investors attempt to front-run the situation following the announcements.
In the meantime, it’s expected that this pair will continue to be very choppy and noisy, which is nothing new. With that being said, you need to be cautious about your position size as it can get you into trouble if you get over exposed. The bond market around the world will continue to be a major player in this currency pair, causing quite a few headaches for those who are not able to keep track of it. Remember, the 50 basis point level is a hard barrier that the Japanese are willing to defend, so at this point it all comes down to whether or not they have to step in and print more currency. It’s been that way for a while, and I think it has not changed.
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