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Chart of the Day: USDJPY

There’s so much to focus on in financial markets at present. But it's hard to go past the FOMC meeting happening 04:00 AEST later, with Federal Reserve Chair Jerome Powell giving a press conference shortly after the statement at 04:30 AEST.

Chart of the Day - July 31, 2019 - USDJPY daily

A 25bp cut has been fully priced for weeks. And the obvious reaction in markets comes if they cut by 50bp or leave rates unchanged, but that’d surprise. In fact, if they leave rates unchanged, then we’ll see markets light up, expressing clear discontent that the Fed has made a policy error. One suspects a hold is a low probability even if the US domestic economy is humming along quite nicely.

I’m not one to advocate trading over this sort of event risk; the variance in the playbook is just too diverse that a high-probability trade is unclear. My view is the Fed cuts by 25bp, stressing the measure is an “insurance” cut while calling a formal end to its balance sheet normalisation program (QT). We’re also likely to see one Fed member dissent.

USDJPY is one market instrument on my radar along with gold and the US500, as USDJPY offers a pure read on how the market interprets the Fed meeting, and also Largely because it tracks US Treasury yields more closely than other FX pairs. Now, should my base-case outcome play out, I wouldn’t expect any really punchy moves in price, and the options market agrees pricing a 45-pip move on the session. In fact, I could argue that the bigger market-mover will come from how the market reads the tone in Powell’s outlook, and will buy USDs should Powell sound more optimistic than recent communications.

I’ll write more on the meeting in the Daily Fix. Needless to say, unless we’re genuinely surprised, I’d expect to see traders selling into moves into 109.10/20 while looking to buy into moves into 108.00/107.90.

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