USD/JPY consolidates above 109.00 level, just off multi-month highs

• USD/JPY has fallen back from multi-month highs but is consolidating comfortably above the 109.00 level.
• The pair is seeing cautious trade ahead of key events later in the week, including Wednesday’s FOMC meeting.

USD/JPY has traded flat for most of Monday’s session, amid subdued US dollar trading conditions. The pair did manage to squeeze out fresh multi-month highs above last Tuesday’s 109.23 high during Asia Pacific trade, but has since spent the majority of the rest of Monday trade consolidating between 109.00-109.20 parameters.

Driving the day

Rangebound trade in USD/JPY is in fitting with a broader feel of consolidation in other asset classes; US equity markets trade a little higher but for the most part within recent ranges, WTI is a little lower but off lows, long-term US government bond yields are a tad lower, though the 10-year yield is still above 1.60%.

The market’s lack of conviction is somewhat unsurprising ahead of key events later in the week; Japanese Industrial Production and Trade numbers for the month of February are set for release on Tuesday alongside a speech from BoJ Governor Haruhiko Kuroda, whose remarks come ahead of the BoJ’s rate decision on Thursday. Note also that National Japanese CPI data for the month of February is out on Thursday.

There are also key risk events of note in the US. US Retail Sales data for the month of January will be released on Tuesday at 12:30GMT. Markets will hope for further evidence that the US consumer is in good health as an indication that the US economic recovery remains on track.

Fed Preview

Meanwhile, Wednesday sees the FOMC release the result of their latest monetary policy decision; the bank is expected to hold interest rates at their zero-lower band (0.0-0.25%) and the rate of asset purchases steady at $120B per month (of which $80B are US government bonds).

The Fed statement and Fed Chair Jerome Powell’s remarks in the press conference are likely to stick to the usual dovish tone; i.e. no rate hikes until the bank has met its updated dual mandate (i.e. full employment and inflation that is moderately and sustainably above 2.0%), something which the Fed is likely to reiterate is still a long way off, and no tapering of asset purchases until substantial further progress has been made towards its dual mandate (something which Powell is also likely to say is a long way off).

The Fed will be releasing new economic projections which will be more closely scrutinised than usual; officials have been talking about how they expect inflation to pick up in the short-run and the updated inflation forecasts will formalise such expectations. The updated dot-plot is also of note; markets have brought forward their expectations of the first Fed hike as soon as late-2022/early-2023, despite the Fed’s old dot plot not forecasting any hikes through to 2024. Maybe the new dot plot might foresee a hike in 2023 (if not, that would be dovish).

Meanwhile, traders will also be on the lookout for any more information of if, when, and how the Fed might respond to further increases in US government bond yields, as well as any hints as to the conditions the Fed might want to see before tapering asset purchases – more information on the former is more likely than on the latter, as the Fed will likely want to avoid causing yields to move higher.

A few technical factors are also worth considering; bank SLF relief (which means they do not have to hold capital reserves for their treasury holdings) is set to expire this month and the Fed needs to decide whether to extend this. If not, this could cause some market problems as banks rush to meet their new, higher capital requirements. Some desks also think the bank might tweak the Interest of Excess Reserves Rate (IOER), which is a tool the bank uses to keep the Federal Funds rate within its target band – if they do, they will insist that this does not constitute a tweak to monetary policy, rather just a technical adjustment to maintain policy.