The US dollar has weakened substantially in recent weeks and months, mostly as a result of lowered expectations for higher interest rates from the Federal Reserve. As usual, the Fed has been giving mixed signals, but the latest market interpretation ahead of this evening's FOMC decision has mostly been dovish. The Fed has appeared to shift the focus of its monetary policy normalisation from rate hikes to balance sheet reduction, and the dimming prospect of higher interest rates has taken a serious toll on the dollar. In-line with this shift, the Fed is not expected to make any interest rate changes today, but more details on its plan to begin shrinking its balance sheet are anticipated.
While the Fed’s recent dovish turn may indeed be a cause for concern for the dollar, especially as several other central banks embark on a hawkish shift towards policy tightening, the dollar’s virtual freefall against other currencies appears to have been overdone. Much of the Fed’s latest dovishness has already been priced-in to the weak and oversold dollar going into this FOMC announcement. Any surprises that may arise, therefore, will likely be to the hawkish side amid widespread dovish expectations.
For the USD/JPY currency pair, the past two weeks have seen the latest bearish leg push the unit below the key 112.00 support/resistance level once again. Only this week has USD/JPY begun to rebound, but heavy pressures on the dollar have made any recovery a struggle. If such a recovery is to take place, it will likely be driven by a Fed that may be perceived as less dovish than currently expected. In this event, the technical hurdle to overcome will be the key 112.00 level, a proverbial “line-in-the-sand” for USD/JPY. Any sustained breakout above 112.00 resistance could propel the currency pair back up towards a key resistance target around the 114.50 level.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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