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Day three: our potential USD/JPY trade

USD/JPY is holding support at 101.20, which represents the 50% retracement of the October to February rally and March 3 low. 

A break of this level will clearly help the USD/JPY trade.

It promises to be a big night for the USD and developed bond markets as well, with the FOMC meeting in play. Importantly here we also get potential revisions to the Fed’s economic projections, while Janet Yellen takes to the stand in her first press conference since becoming chairman.

The potential for near-term changes to the Fed’s economic projections are real given how the economy has struggled with weather of late. However, the market is most focused on whether the Fed will change its current guidance for altering the fed funds rate (the Fed’s interest rate) as and when unemployment rate breaches the 6.5% threshold.

We have already heard from a number of officials that this guidance is obsolete and should be amended and therefore we should be too surprised if they change this guidance to something more qualitative. If we hear something along the lines that rate hikes are unlikely until well past the time when bond purchases have been completed, it would be a likely outcome.

A failure to change this guidance, although unlikely, is a real risk to this trade and would cause a sizeable sell-off in the US bond market and put a huge bid in the USD.

We should also hear Janet Yellen’s view on the slack in the economy; a failure to do so would also be USD positive. Another USD positive would be if the Fed talked in more detail around wage growth, which was prevalent at the last payrolls report.

The big USD negative comes if the Fed alters the guidance to a more dovish stance, while talking more vocally about the slack in the labour market.

USD/JPY
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