Market Focus Shifts to FOMC

Now that geopolitical risk is out of the picture following the Trump – Kim Summit in Singapore on Tuesday, the more important Federal Reserve policy announcement is in the spotlight today.

The Summit went smoothly in the sense that it was great news for investors who had feared geopolitical risks getting escalated. The immediate reaction in the markets was an easing in safe haven asset demand such as for the yen. The main beneficiary of the positive picture after the Summit was the USDJPY which has been rallying since Monday. Meanwhile, investors are buying the pair ahead of the FOMC announcement later in the day, pricing in a rate hike at this meeting.

The Federal Reserve kicked off its two-day policy meeting on Tuesday and a much awaited rate announcement is due today with a widely expected 25 basis point increase in the Fed Funds rate to 2 percent.

While a rate hike today is pretty much a done deal and already priced in by the markets, the main question is will there be more rate hikes for the rest of the year?

The main attention will be on Fed Chief Jerome Powell’s press conference and the FOMC Economic Projections for any clues into the U.S central bank’s rate hike path.

The current Fed policymakers’ median forecast is for a total of three hikes in 2018 but will the number be bumped up to four? A shift upwards in the so-called “Dot Plot” would be seen as hawkish and would likely result in a dollar rally, particularly against the Japanese yen as the US-Japan bond yield differential would increase.

The USDJPY pair has put in a strong rally so far today, reaching as high as 110.71 yen. Will it break the key 111-yen level? The pair has been trading below this psychological level since May 23.

USDJPY has made a strong recovery since late March, reversing a 3-month long decline that plunged the pair to the 104 handle. Prices need to make a sustained break above 111 in order to see a continuation of the recent bullish move. The market has broken above the 200-day moving average, giving a bullish signal.