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Cautious trading ahead of FOMC

After a terrible start to the week, the financial and energy sector stocks are getting some reprieve from bargain hunters.

Federal reserve building
Source: Bloomberg

Despite oil prices extending their slide and pushing five-year lows, WTI has been trading under $55, while Brent has been drifting under $60.

The swing in sentiment reflects the growing volatility in the markets, as investors are on edge ahead of the Federal Open Market Committee (FOMC) meeting tonight. 

The volatility index or VIX, widely used as a gauge of fear and uncertainty in the market, jumped 15% last night to hit a two-month high of 23.57 points.

This follows the 78% jump we saw just last week alone.

Tax hike expectations building up

Expectations are high that the Federal Reserve will take a more hawkish posture and perhaps drop its pledge to keep interest rates near zero for ‘a considerable time’. Any change in language or cues that might raise expectations of a rate hike would likely spark a rally for the greenback.

This puts the focus on USD/JPY, which saw a pullback overnight as nervous investors flocked to the safe haven Japanese currency. We should see some strengthening of the pair though as expectations build up ahead of the FOMC event.

On a one-hour chart, USD/JPY appears to be on an uptrend line and is likely to test a resistance level of 117.29. A clear break above this will signal bullish momentum that could see it climb towards the next resistance level of 119.00.

USD/JPY
Click to enlarge

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