Fed and BoJ in play this week

The FX space is in for a big week, with two of the major central banks set to hit the wires.

On Thursday we have the FOMC and BoJ meeting and this puts USD/JPY firmly in focus for the week. USD/JPY gapped higher this morning from around 97.40 to 97.80. However, the pair swiftly pulled back to fill the gap as investors remain uncertain of the outcomes from the two key meetings this week. The pair found support in the 97 region on Friday and I feel that will remain as support in the near term. Trend support on USD/JPY drawn from the June 13 low kicks in at 97.04 and it will be interesting to see if the pair can hold this level in the coming week.

Central bank’s assessment

The interesting price action will come if the Fed change their language back to what we saw in May when they detailed that they had the flexibility to increase or decrease asset purchases. I expect the FOMC meeting to give markets some insight into how the Fed feels about the recent shutdown and fiscal developments and effect this has on the US economy. The fact that the BoJ meeting comes after the Fed means we could see a situation where the BoJ react to the Fed’s language. Should the Fed’s tone result in further USD weakness, then potentially the BoJ will feel obliged to take a bold step to ensure further yen weakness against the greenback.

Key events for the AUD

Looking at the risk currency space, AUD/USD has been consolidating around the 0.96 level, which is what I had highlighted last week. There are a couple of key events for the AUD this week, starting with Glenn Stevens’ speech tomorrow at 9.30 AEDST. This speech should be interesting considering the rapid change in analyst expectations for local monetary policy. The market is now firmly positioned for a prolonged wait-and-see approach; with scattered calls for a rate hike in the back end of next year. On Friday we have manufacturing PMI out at midday, with a reading of 51.2 expected. This will be followed up with the revised HSBC manufacturing PMI reading which is expected to be at 50.7. While these two events will shape the AUD’s potential demise for the week, I still feel the USD side of the equation will provide the action for the week.

EUR/USD one to watch this week

EUR/USD remains elevated and holding onto the 1.38 handle. My colleague Chris Weston will be covering this pair in detail this week so please feel free to visit his analysis on the pair. Cable is not doing much at all and is currently going through a consolidation phase at 1.618.

Calm before the storm for USD/JPY

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