The FOMC Statement Sounds Dovish; What to Expect from the USD/JPY?

The FOMC Statement Sounds Dovish; What to Expect from the USD/JPY?

USDJPY was very bullish today, rallying about 100 pips from its low just above 102 to above 103 before the FOMC decision. This rally was based on a strong US Q2 GDP print – the advanced estimate showed an annual growth rate of 4.0%, beating forecasts of around 3.1%. Q1 GDP was revised up to an annual rate of -2.1% from -2.9%.

Federal Reserve

This represents just the latest of many strong Q2 data points, which should understandably drive the market to expect a hawkish FOMC – one that would consider an earlier rate hike than in mid-2015.

The USD/JPY rallied sharply after the GDP data. It was pushing at the 102.80-103 resistance area. IF the FOMC came out saying that a rate hike is projected to earlier than mid-2015, OR if tapering was faster than the $10B pace, it would have been hawkish, and USD-strength would have more likely continued to gain. Instead, the FOMC announced pretty much the same taper and wait stance. But how it address  strong Q2 data?

“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” from the official FOMC Statement

This is a dovish response to positive data. For example, if employment is near 5%, and inflation near or above 2.0% on the year, it would be hard to imagine the FOMC not raising rates. While this statement slow down recent USD-strength, I don’t think it will reverse it. We are no longer in the shadow of the Q1 contraction and there is bias to believe the rate hike will be before rather than after mid-2015.

With that interpretation, we can expect some short-term USD-consolidation after the recent weeks of run-up.

However, it should remain elevated. In the USD/JPY that means, we should anticipate support in the 102 area, which is the middle of the last few month’s price range from roughly 101.05 to 103.

USD/JPY Daily Chart 7/30
usdjpy daily chart 7/30

(click to enlarge)

When you look at the 102 area, you can see that the 200-, 100- and 50-day SMAs are clustered there. A bullish market should respect this area as support. Also, if the daily RSI falls back to the 40-50 area and turns back up, we can expect a bullish continuation attempt.

If USD/JPY clears the 103 area, the next key level will be at 104-104.13, the highs in April. After that, the market will expose the 2014-high just under 105.50.

IF the USD/JPY can’t hold above 102, the bullish outlook should be scrapped, and the focus should be back to the 100.75 low on the year.

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