The USD/JPY rally that started on 27th November continued last week. This rally is attributed to several factors including: the normalized tensions between United States and North Korea, the tax reform bill that is currently in the Republican conference, the rising treasury yields, and the improving employment situation in the United States. There was no major news coming from Japan last week.
This week, the focus among investors will be the Federal Open Market Commission (FOMC) meeting which starts on Tuesday. The commission will make its interest rate decision on Wednesday. Investors expect a rate hike. This was boosted by the data released last week.
The rate increase will not play a major role on USD/JPY pair. Instead, investors will be paying a closer attention to Janet Yellen’s statement which is expected to signal Fed’s activities for next year. Most investors expect three hikes.
In Japan, this will be a slightly slow week with only two major economic data scheduled. On Thursday, BoJ will release Q4’s Tankan Large Manufacturers index and the Non-Manufacturers Index. The two data points show measure the performance of the manufacturing and the non-manufacturing sectors in the country. Investors expect the manufacturing activity to improve to 24 and the non-manufacturing data to improve to 24. This data – while important – will be overshadowed by the Fed Meeting.
As mentioned, not much activity is expected until Wednesday when Fed announces its interest rate decision and during Janet Yellen’s presentation.
We can expect several scenarios. First, before the data is released on Wednesday, the first resistance of 114.78 could be reached. Second, if the Fed raises interest rates and Yellen is upbeat about the economy and inflation, and therefore signals more rate hikes, the pair could continue going up to 118.7. As you can see in the chart above, the RSI is currently at 59 which indicates a further upside.
The second unlikely scenario is if the Fed leaves rates steady and signals less hikes than expected. This scenario will lead to a fall in the pair to the 110.79 level with a potential of it falling back to 108.1 level. I believe that is highly unlikely especially during Yellen’s tenure. Part of her legacy is on how easy she has been to predict.
While I expect the first scenario to play out, traders should pay close attention to the United States. Trump has earned a reputation of being unpredictable and no one knows what he will say or Tweet. In the past, his tweets have moved markets. Also, traders should look closely at the Mueller investigation, and the tax reform process. All this could affect the pair.