The USD/JPY has had a relatively strong bearish correction in the first half of October, coming down from the 2014-high of 110.08 to 105.19. Since then, it has been rebounding. Going into tomorrow’s FOMC decision, it looks ready for a bullish continuation, with early 10/28 price action adding to the case because it bounced off last week’s rising trendline.
USD/JPY started the week with a price top. We noted support in the 107.35-107.50 area, which included last week’s rising trendline as well as the 100-period SMA, and a previous resistance area. We also noted that the RSI should find support above 40.
It seems like the market was quicker to buy on USD/JPY’s dip and price is starting the 10/28 US session above 108, poised to test that 108.35 handle.
We can see that a break above 108.35 can open up the 110-110.08 highs, though there might be some near-term resistance around the 108.70 support/resistance pivot. If price can start holding above 108.00 on a subsequent pullback, the bullish outlook will liekly gain traction.
FOMC: The market is expecting the Fed to vote for finally eliminating QE. This would be a critical milestone since the financial crisis, and brings the FOMC another step closer to raising rates.
The current rally in the USD/JPY can be partly attributed to the expectation of QE removal, but the market has short attention span, and will immediately jump back to speculating about the rate hike. If the FOMC announces the complete removal of QE, then warns that it needs to now sit and wait, it might hint at delaying the rate hike. This is a slightly dovish expectation, while most analysts and market watchers don’t believe the fed will make any changes to its forward guidance, which projects for a rate hike in mid-2015.
Now, if price action was able to break above 108.35 ahead of the FOMC risk, but falls back below 107.50 after it, we are likely going to continue October’s consolidation mode into November, with downside risk back to 105.19 and maybe lower. Some might wait for a break below a more psychologically important level of 107.00 to shelve the bullish outlook.
However, if USD/JPY can stay above 107.50, preferably above 108.00, the bullish continuation outlook will remain in play, with the 110-110.08 high in sight in the short-term, and with risk of further upside going into the end of the year.
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