The interest rate outlook differential could boost demand for USDJPY

Jan 17, 2016
As expected the FOMC left the Fed fund rate unchanged in the range from 1.25% to 1.% naming this level a relatively low level would help to support continued job growth and stronger inflation leaving the door opened for another 0.25% hike next march.
In its economic assessment the committee maintained its phrase "The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2% inflation"
The committee looked confident in reaching the Fed 2% inflation goal amid the current economic expansion which has been fueled by $1.5 trillion in tax cuts taking effect this year, after GDP growth by 2.3% last year.
Despite its appreciation of the current weaker than expected inflationary wages pressure, The committee has expected that the inflation in US is to begin rising more quickly.

The markets will be waiting for the new Fed’s chairman Mr. Powell who will deliver his first semiannual speech about the monetary policy before the Senate and the House later this month, after taking Yellen place starting from next week.
Mr. Powell has been going along with committee members majority in each decision for hiking the interest rate since joining it in 2012 and he pledged to adopt the same gradual path of tightening.

The FOMC confidence in the US economic outlook could spur demand for the greenback and give the UST yield curve further support, after it could bounce up with the risk appetite rebounding.
After the committee meeting, UST 10yr yield could extend its rebound from 2.68% to 2.74% but it has resided for trading now close to 2.725%.

USDJPY could not also find anyway but to go up higher further driving Nikkei 225 to gain 387.82 points because of the current discrepancy between the Fed's stance and BOJ which reassured this week on maintaining the current ultra easing policy stance as the inflation in Japan is still well below its 2% goal.
After BOJ decision to keep interest rates and asset purchases at current levels, BOJ Governor Haruhiko Kuroda came out to say clearly that "the central bank is not yet in a position to consider exiting of its current policy"

USDJPY is now trading close to 109.50 area above its 200 hours moving average for the first time since last Jan. 23, while the risk appetite rebounding is putting more weights on the Japanese yen as a low cost financing currency. The JGB 10yr yield is now at 0.097%.

USDJPY is now trading in its first day above its daily Parabolic SAR (step 0.02, maximum 0.2) which is reading today 108.28 whereas it has started it rebound on last Jan. 26.
The downside momentum on USDJPY eased down but it is still undermined by trading well below its daily SMA50, its daily SMA100 and also its daily SMA200 USDJPY is in need now to have a bullish sign by overcome 109.76 lower high which stopped it last Jan. 26 and the failure can keep it exposed to forming a lower high to resume this descending channel.
USDJPY daily RSI-14 is referring now to higher existence inside its neutral territory reading 38.559, after rebounding inside its oversold area below 30.
USDJPY daily Stochastic Oscillator (5, 3, 3) which is more sensitive to the volatility is having now its main line inside its neutral region at 52.717 leading to the upside its signal line which is lower in the same region at 34.451, after convergence by bottoming out at 108.28.

Important levels: Daily SMA50 @ 111.75, Daily SMA100 @ 112.25 and Daily SMA200 @ 110.70
S3: 108.28
S2: 108.31
S3: 106.02
R1: 109.76
R2: 111.50
R3: 113.74

Have a good day
Global Market Strategist of FX-Recommends
Walid Salah El Din