USD:
The US dollar weakened across the board on Thursday after Trump canceled the planned attacks on Iran and announced a deal to be signed in the following days. As a result, Fed rate hike expectations were pared back immediately, with the market now pricing in 16 basis points of tightening by year-end compared to 24 basis points before the deal announcement.
In the short-term, the focus will be on this new development as oil prices fall and inflation concerns ease. On Wednesday, the FOMC rate decision is expected, with the Fed anticipated to keep interest rates unchanged and drop the easing bias. The Fed will also release the latest economic projections and the dot plot.
The market might forgive some hawkish tone from the Fed decision in light of this new development but not if the central bank places more weight on economic strength rather than easing inflation expectations.
Looking ahead, oil prices will likely continue to fall and might reach pre-war levels. The risk then is that the negative supply shock turns into a positive demand shock that boosts economic activity further, potentially requiring rate hikes anyway. For now, the markets can celebrate.
JPY:
On the JPY side, the currency strengthened against the US dollar but remained weak against the other major currencies amid the positive risk sentiment. The BoJ is expected to hike by 25 bps tomorrow, bringing the policy rate to 1.00%. The central bank is also expected to announce a pause to the bond tapering programme from next fiscal year.
The US-Iran deal and lower oil prices will likely increase economic activity and might strengthen the case for further tightening in the second half of the year. The focus tomorrow will be on forward guidance, but keep in mind that Governor Ueda has been hospitalized, so he will advise the committee remotely but won’t participate in the voting process. The press conference will be held by deputy governor Uchida.
USDJPY Technical Analysis – Daily Timeframe
On the daily chart, USDJPY shows a pullback after the US-Iran deal announcement, with the price consolidating since. The natural target remains the cycle high around the 162.00 handle, but a more hawkish-than-expected BoJ could trigger a bigger pullback toward the 158.00 support.
USDJPY Technical Analysis – 4 Hour Timeframe
On the 4-hour chart, the minor upward trendline continues to act as support. Buyers are expected to lean on the trendline with defined risk below it to push into new highs. Sellers will want to see the price break lower to pave the way for a drop toward the 158.00 support next.
USDJPY Technical Analysis – 1 Hour Timeframe
On the 1-hour chart, recent consolidation is evident, with price action forming a symmetrical triangle. Buyers will seek a breakout above the downward trendline to boost bullish bets into new highs, while sellers will target a break below the upward trendline. The FOMC decision is expected on Wednesday, followed by US Jobless Claims data on Thursday.
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