Japanese yen drifting as FOMC looms

Japanese markets are closed for a holiday today and the Japanese yen is having a quiet day. USD/JPY is currently trading at 114.07, up 0.10% on the day.

FOMC expected to taper

The FOMC holds a crucial today, with the Fed very likely to scale back its USD 120 billion/mth bond purchase program (QE). The key question is just how much the Fed plans to trim QE. The markets are expecting a cut of USD 15 billion/mth, and anything else could shake up the currency markets. A smaller taper would be considered a dovish move and would weigh on the greenback, while a larger reduction would make the equity markets nervous and put upward pressure on the US dollar.

As for a rate hike, that is a whole different story. Fed Chair Jerome Powell has taken pains to remind the markets that a Fed taper does not mean that a rate hike is imminent. Still, traders have already priced in at least two rate hikes in 2022, which most Fed members do not see a rate hike before 2023. This shows a significant disconnect between market expectations and Fed guidance. The markets have been much more hawkish about inflation, which has hit its highest level in 30 years. The Fed had insisted that inflation was transitory and would ease up, but inflation has not shown any signs of cooling. Will Powell cling onto the “transitory” view in his rate statement or press conference? If so, the dollar could come under pressure. Conversely, an acknowledgment by the Fed that inflation isn’t going anywhere anytime soon could be understood by the markets as a signal that the Fed is accelerating its forward guidance, which would be bullish for the US dollar.

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USD/JPY Technical

• There is resistance at 114.43. Above, there is resistance at 114.90
•  There is support at 113.38. This is followed by support at 112.80

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