This week, the main event risk for the USD will be the FOMC meeting minutes to be released on Wednesday. The USD/JPY has been sticking around the 102 level, and has actually reverted to levels before last week’s NFP-rally.
USD/JPY is at the Crossroads: The 4H chart shows a market that is in a pullback after a breakout. The pullback is strong and is at the cusp of invalidating the breakout. However USD/JPY is still at the crossroads around a rising trendline from the end of June, a falling trendline from the beginning of June, and the 200-4H simple moving average.
The 4H RSI is at 40. After climbing above 70 last week, if the RSI can hold above 40 this week, it would reflect the building up of bullish momentum.
A break below the 101.60 pivot should be a strong sign that USD/JPY is looking toward the 101.25 low and possibly the 100.76-100.85 lows on the year. The ability to push back above 102 on the other hand would suggest some short-term bullish outlook at least toward the 102.80-103 area.
How should we use the FOMC minutes to determine which way USD/JPY will go from the cross roads its trading in?
Backdrop: Very weak Q1 GDP data (-2.9% annualized) has stoked concerns of a weak second quarter as well. We had some manufacturing data to suggest an underwhelming Q2. However jobs reports have been relatively positive. It all depends on how the FOMC is looking at growth in relation to its rate hike outlook, which stands at mid-2015 for now.
What can we expect after the FOMC minutes?
1) No change: If the FOMC meeting minutes does not change the mid-2015 projection, the USD/JPY has not directional clue, and could simply oscillate around 102, roughly between 100.85 and 103 (range since May).
2) Push back rate hike outlook: If Q2 GDP concern has caused the Fed to consider holding low rates further, then USD/JPY will be heavy, and the 100.76-100.85 2014 lows will likely be tested in a hurry, and possibly break.
3) Push forward: It is very unlikely the FOMC will consider raising rates in the first half of the year. There are too many weak data at the moment. But if this consideration is laid on the table based on other factors such as employment, inflation expectation, or housing outlook, the USD/JPY will likely push back above 102 with the consolidation highs around 103 in sight.
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