USD/JPY – Fed Hike Propels Dollar Past 118 Yen

USD/JPY continues to post sharp gains on Thursday, following strong gains in the Wednesday session. Currently, the pair is trading at 118.50. On the release front, Japanese Flash Manufacturing PMI improved to 51.9, beating the forecast of 51.5. In the US, there are a host of releases. Today’s highlights are CPI reports, unemployment claims and the Philly Fed Manufacturing Index. On Friday, the US releases Building Permits.

The Federal Reserve’s rate hike was widely expected and priced in by the markets at close to 100%. Still, the yen dropped sharply after the rate announcement, losing 1.5 percent on Wednesday. The rate hike was historic, marking the first rise since December 2015 and only the second rate hike since 2008. In its rate statement, the Fed sounded positive about the economy, noting that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year”. As well, the Fed revised upwards its forecast of US economic growth to 1.9% in 2016 and 2.1% in 2017, slightly higher than the Fed’s September estimate. What’s next for the Fed? In September, Fed officials said they expected two rate hikes in 2017, but the Fed is now projecting three or even four hikes next year. However, projections can change based on economic conditions, and the wild card of Donald Trump could also play a critical role in monetary policy. Trump’s economic platform remains sketchy, apart from declarations that he will increase government spending and cut taxes. If Trump’s economic policies lead to higher inflation levels, the Fed may have to step in with larger hikes in order to keep the economy form overheating.

Dot-Plot Blindness has Dollar Bears Bailings

On Wednesday, Japan released the Tankan indices, key indicators which gauge activity in the manufacturing and non-manufacturing sectors. The Tankan Manufacturing Index improved from 6 to 10 points, matching the forecast. The Non-Manufacturing Index remained unchanged at 18 points, just below the forecast of 19 points. These figures point to optimism among large manufacturing and non-manufacturing sectors. The Bank of Japan meets on December 18, and is expected to leave interest rates unchanged at -0.10%. The bank has lowered negative rates into negative territory, but the radical easing has done little to kick-start economic growth or raise anemic inflation levels.

USD/JPY Fundamentals

• 8:30 US CPI. Estimate 0.2%
• 8:30 US Core CPI. Estimate 0.2%
• 8:30 US Philly Fed Manufacturing Index. Estimate 9.1
• 8:30 US Unemployment Claims
• 8:30 US Current Account. Estimate -111B
• 8:30 US Empire State Manufacturing Index. Estimate 3.2
• 9:45 US Flash Manufacturing PMI. Estimate 54.2
• 10:00 US NAHB Housing Market Index. Estimate 63 points
• 10:30 US Natural Gas Storage. Estimate -126B
• 16:00 US TIC Long-Term Purchases

Upcoming Key Events

Friday (December 16)

• 8:30 US Building Permits. Estimate 1.24M 
• 8:30 US Housing Starts. Estimate 1.23M

*All release times are EST

*Key events are in bold

USD/JPY for Thursday, December 15, 2016

USD/JPY December 15 at 6:50 EST

Open: 117.20 High: 118.66 Low: 117.19 Close: 118.46

USD/JPY Technical

• USD/JPY posted small gains in the Asian session and has continued with sharp gains in European trade
• 118.05 has switched to support following strong gains by USD/JPY
• 118.85 is under pressure in resistance and could break in the Thursday session
• Current range: 118.05 to 118.85

Further levels in both directions:

• Below: 118.05, 116.88 and 115.88
•  Above: 118.85, 119.83 and 120.74

OANDA’s Open Positions Ratio

USD/JPY ratio is showing gains in short positions. Currently, long positions have a majority (55%). This is indicative of trader bias towards USD/JPY reversing directions and moving lower.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.