Forex Market Action and Expectations

The USD is mixed to start New York this morning, unchanged against the Yen, lower against the GBP and steady against the EURO. Traders appear heavily focused on the BOJ rate announcement on Thursday and overnight the markets appear to have dropped their forecasts for a rate hike. Currently the interest rate markets are pricing in a roughly 30% chance that the BOJ will hike rates 25 BP; down from the 80% chance forecast only Tuesday morning. Overnight saw the usual option-related defense of the USD/JPY on the approach to 121.00 handle with a high print at 120.88 on lighter volume. Exporters were again active on the sell side and rumors that the MOF “encouraged” a car company to buy Yen also helped cap the potential rally.

USD/JPY trading near the lows at the start of New York trade. Cable is higher to start New York after a solid two way overnight session. Traders say Japanese demand for Sterling-Yen kept cable firm into European trade where follow-through strength kept the rate bid into New York. EURO tracked the GBP both ways overnight but remained contained inside established ranges, currently a bit lower to start New York after a light volume overnight session. Analysts are watching this mornings US data closely for additional near-term USD direction but many are saying the BOJ rate announcement will likely carry more weight this week; most analysts feel that the inflation picture is benign and expect nothing new from this week’s PPI and CPI data nor do they expect anything surprising in Philly Fed sentiment. TICS is likely to cover so the data total should be USD neutral. In my view the USD is setting up for at least a long-liquidation break to end the week.

The USD/JPY pair is hovering in a price range that has attracted solid selling previously and only needs a slight catalyst to force longs to bail. Should the BOJ hike rates this week traders will likely see that as more of a psychological push on sentiment with a long-term implication. A top in USD/JPY would be in I think at that point; neutral to weak USD data in addition this week would only accelerate the move. Should the BOJ hold rates firm then the statement will be heavily scrutinized for clues to when the next hike is coming.

USD/JPY Daily

Rate likely to be topping again having spent so much time at the 120.50 area with strong selling interest on each minor high. Longs would have to be nervous if set this week so look for at least a liquidating break near-term into reasonable support; likely the 119.50 area. Stops said to be on both sides of current pricing so expect volatility. Aggressive traders can sell USD/JPY anywhere over 120.50.

GBP/USD Daily

Pair taking a breather on current recovery attempt, some selling at the 1.9700 area but bids have absorbed offers on the dips; OK to add to existing longs looking for attempt into the 1.9800 area; stops said to be thick above the 1.9710/20 area of near-term resistance. New highs coming in my view, look for a rally to end the week and an attempt at a close over 1.9700.

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Jason Jankovsky

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