- Brexit/UK elections keep risk appetite at bay, while US CPI and FOMC come to the fore from here.
- The risk of a bearish extension will increase on a break below 108.40.
USD/JPY has been as high as 108.85 prior to the open and sent down to a low of 108.66 in recent trade and then back to the 108.70s as the price attempts to stabilise. It has been a choppy start in Asia today ahead of what is likely to be a volatile rest fo the week into the close.
Firstly, Brexit remains a major factor for the FX space. The latest YouGov polls have the Conservatives losing grip of their victory margin as follows:
The latest YouGov results
UK Election: YouGov/Times MRP Model projects Conservative majority of 28 (Nov. 27: Majority Of 68)Con 339 (-20).
- Lab 231 (+20).
- Lib Dem 15 (+2).
- SNP 41 (-2).
- Plaid 4 (0).
- Green 1 (0).
- Other 1 (0).
This lead to speculative longs unwinding their positions in GBP and consequently, supported the yen on flows and risk-off trading.
Looking ahead, the next major factor for the pair lies in the Federal Reserve interest rate decision later today. We will also have the US November CPI which is expected to tick up to 2.0%year, 2.3%year ex-food & energy.
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US Consumer Price Index November Preview: Inflation nostalgia
The Fed will release the policy decision, economic and rate Projection Materials at 19:00 GMT. 2:00 EST while the Fed Chairman Powell will read his statement and hold a news conference starting at 19:30 GMT, 2:30 EST. No change is expected with markets fully priced for a steady hand on the federal funds rate at 1.50-1.75%. However, the statement will be key as will the quarterly Summary of Economic Projections, especially the “dot plot” which will ‘plot’ the likely path of interest rates.
“In September, the median dot for end-2020 was 1.88% and higher again in 2021 but with a wide range of dots. Risks are for these to be lowered, despite the FOMC’s broadly upbeat outlook,” analysts at Westpac explained.
“For the markets and the US dollar the key to this FOMC lies in the Projection Materials,” Joseph Trevisani, Senior Analyst at FXStreet, explained.
Will the governors mark down their fed funds estimate for next year to take account of the current 1.75% rate or will they see a brighter future and raise their GDP and rate projections for 2020. This rather straightforward economic analysis will either propel or retard the dollar for the next several weeks.
USD/JPY levels
The advance in the USD/JPY pair fell short of changing the dominant bearish tone, as it would need to move at least beyond 109.30 to start attracting speculative buying. In the 4-hour chart, the pair has settled above a mild-bearish 20 SMA but remains below the larger ones. Technical indicators in the mentioned time frame, continue lacking directional strength, stuck around their midlines. The risk of a bearish extension will increase on a break below 108.40.
Valeria Bednarik, the Chief analyst at FXStreet explained.
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