USDJPY: Will the Fed Provide a Shot of Adrenaline?

The sun rises on a new trading day, and traders rolled out of bed particularly eagerly today in anticipation of the Fed’s monetary policy announcement. With a staggering number of central banks across the world turning more dovish over the past two weeks, traders are starting to wonder if the Fed can maintain its moderately hawkish posture. On one hand, economic data (particularly when it comes to the labor market) has been relatively solid of late, but on the other hand, there lack of any inflationary pressures and the economic slowdown overseas could cause the central bank to lean more toward leaving policy unchanged and reevaluating in March.

We tend to fall in the latter camp. No doubt you’ve heard the marketing spiel that “40 is the new 30,” but in the current low-and-getting-lower interest rate world, traders seem to believe that “neutral monetary policy is the new hawkish” as the US dollar continues to surged despite the Fed’s balanced outlook. This dollar strength, in and of itself, exacerbates the problem of low inflation as the price of imports drop and the profits of multinational companies are hit.

Therefore, the Fed’s statement should reiterate that the central bank can “be patient in beginning to normalize the stance of monetary policy” as the central banks punts the tough decision on whether to change its guidance to the March meeting, when it can be more fully explained by a press conference with Fed Chair Yellen (this meeting does not feature a press conference or the Fed’s Summary of Economic Projects, aka the “dot chart”). Therefore, today’s monetary policy statement may pass without much excitement, much to eager traders’ chagrin.

Technical View: USDJPY

As we often note, US data and announcements tend to have the cleanest and most “logical” reaction on USDJPY, and that pair could certainly use a shot of adrenaline right now. Over the last week and a half, USDJPY has traded in a tight range, staying within about 80 pips of the 118.00 handle since mid-January.

Looking to the chart, rates have put in a series of modestly higher lows and lower highs, forming a symmetrical triangle pattern. For the uninitiated, this pattern is analogous to a person compressing a coiled spring: as the range continues to contract, energy builds up within the spring. When one of the pressure points is eventually removed, the spring will explode in that direction. Similarly, when USDJPY breaks out from its triangle, a strong continuation in the same direction is likely. Astute traders will also note that there is a corresponding symmetrical triangle pattern in the RSI indicator.

That said, it’s notoriously difficult to predict the direction of the inevitable breakout. Therefore, readers may want to wait for the breakout statement before trading. Based on the height of the triangle, USDJPY could continue in that direction for around 150 pips, which could take rates up to around 120.00 on a bullish breakout or back down toward the 2-month low near 116.00 on a bearish breakdown.