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It seems the market is broadly expecting Yellen to remain fairly dovish, focusing on measures of labour market slack that support continued policy accommodation. In such a case, we might see a stall in the USD rally, followed by a reversal in most of the key currency pairs.
However, any shift away from her usual dovish stance could be a game changer and lead to further USD strength in the near term, bearing in mind yesterday’s minutes showed a switch to a modestly hawkish view.
The key from the minutes was the fact the Fed views the labour market as improving more rapidly than expected. This could lead to a revision in the ‘underutilisation’ of the labour market view.
Traders await a catalyst
USD/JPY will be the pair to watch closely after outperforming the FX space this week. The pair is just shy of 104 in Asian trade after knocking through some key barriers this week. The move has primarily been USD-centric and is quite vulnerable in the near term as a result.
USD/JPY topped out at 104.13 in April – the short-term level to watch. The RSI shows the pair is overbought at the moment, which is likely to result in traders exercising near-term caution. Support is where a previous resistance line was in the 103.30 region.