USD/JPY Bearish Sequence Remains Intact Ahead of FOMC Meeting

FX TALKING POINTS:

– USD/JPY Remains Under Pressure Despite Above-Forecast U. of Michigan Confidence Survey. Bearish Sequence Remains Intact Ahead of Federal Open Market Committee (FOMC) Meeting.

– NZD/USD Rebound Unravels Ahead of Last Meeting with Governor Grant Spencer. Reserve Bank of New Zealand (RBNZ) to Endorse Wait-and-See Approach.

USD/JPY BEARISH SEQUENCE REMAINS INTACT AHEAD OF FEDERAL OPEN MARKET COMMITTEE (FOMC) MEETING

USD/JPY remains under pressure even as the U. of Michigan Confidence survey unexpectedly climbs to 102.0 from 99.7 in February, and the near-term rebound may continue to unravel ahead of the Federal Open Market Committee (FOMC) meeting as the pair extends the bearish sequence from earlier this week.

Even though the FOMC is widely expected to raise the benchmark interest rate on March 21, the updated forecasts from Chairman Jerome Powell and Co. is likely to influence the near-term outlook for the U.S. dollar as the central bank pledges to further normalize monetary policy over the coming months. The FOMC may deliver a hawkish rate-hike as the ongoing improvements in labor market dynamics are expected to boost wage growth, and the first press conference with Chairman Powell may heighten the appeal of the dollar if the central bank head shows a greater willingness to implement a more aggressive hiking-cycle.

At the same time, projections for three rate-hikes in 2018 may do little to heighten the appeal of the greenback as officials see a neutral Fed Funds rate of around 2.75% to 3.00%, and more of the same from central bank may ultimately fuel the recent decline in USD/JPY as it undermines bets for four rate-hikes in 2018. With that said, the monthly-low (105.25) remains on the radar following the failed attempt to close above the 106.70 (38.2% retracement) to 107.20 (61.8% retracement) region, with the pair at risk for further losses as it continues to carve a series of lower highs & lows.

USD/JPY DAILY CHART

• May see USD/JPY test the 2018-low (105.25) as it preserves the bearish sequence from earlier this week, but need a break/close below the 105.40 (50% retracement) to bring the downside targets on the radar, with the next region of interest coming in around 104.10 (78.6% retracement) to 104.20 (61.8% retracement).
• Keeping a close eye on the Relative Strength Index (RSI) as it fails to flash a bearish trigger ahead of the FOMC meeting, with the oscillator warning of range-bound conditions as it holds above trendline support.

NZD/USD REBOUND UNRAVELS AHEAD OF LAST MEETING WITH RESERVE BANK OF NEW ZEALAND (RBNZ) GOVERNOR GRANT SPENCER

The near-term rebound in NZD/USD appears to have stalled ahead of the February-high (0.7437) as the pair fills the gap from earlier this week, and recent price action raises the risk for a further decline in the kiwi-dollar exchange rate as it carves a fresh series of lower highs & lows.

Keep in mind, the Reserve Bank of New Zealand (RBNZ) also convenes next week, with the central bank widely expected to retain the record-low cash rate at the last meeting with acting-Governor Grant Spencer. More of the same from the RBNZ may fuel the recent weakness in the New Zealand dollar as market participants scale back bets for a rate-hike in 2018, and the central bank may continue to tame expectations for a higher borrowing-costs as ‘GDP growth eased over the second half of 2017.’

Slower growth paired with signs of limited inflation may push incoming-Governing Adrian Orr to adopt a similar approach, with the New Zealand dollar at risk of facing a more bearish fate over the coming days as the advance from the March-low (0.7186) unravels.

NZD/USD DAILY CHART

• Failure to break/close above the 0.7330 (38.2% retracement) to 0.7380 (23.6% retracement) hurdle may spur a larger pullback in NZD/USD especially as the pair carves a fresh series of lower highs & lows, while the Relative Strength Index (RSI) extends the bearish sequence from earlier this year.
• A close below the 0.7240 (61.8% retracement) to 0.7260 (38.2% retracement) region raises the risk for a move back towards 0.7170 (50% retracement) to 0.7200 (38.2% retracement), which lines up with the monthly-low (0.7186), with the next downside region of interest coming in around 0.7040 (50% retracement) to 0.7100 (38.2% expansion).

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— Written by David Song, Currency Analyst

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