If Fed signals the possibility of a 4th rate hike, USD/JPY is likely to rally. 

The market has priced in a 100% chance of a quarter point rate hike tonight. Jerome Powell will be making the announcement for the first time as Fed Chairman. During Jerome Powell’s testimonies 2 weeks back, he viewed the near-term risks to economic outlook as roughly balanced but will continue to monitor inflation closely. However, a slew of mixed data since the last policy meeting could have caused some changes. 

  • Job growth was very strong and economic activities accelerated but wages and spending growth softened. 
  • The dot plot, projections of the 16 members of FOMC, will be one of the main focus during the upcoming meeting. 
  • Market will also be looking at Fed’s comments on important topics such as inflation, the state of the US economy and politics. 
  • A report by CNBC mentioned that the market has priced in a 40% chance for a fourth December rate hike. If Fed skips the possibility of a 4th rate hike, that will be a dovish stance to the market. 
  • USD/JPY will be the most volatile during the upcoming FOMC. If a 4thrate hike is hinted in the dot plot, USD/JPY could break out of its downtrend towards 108 regions. 
  • However, we are leaning towards the possibility that Fed might not signal a 4th rate hike as explained in our Weekly Market Report on Monday. If that happens, USD/JPY could fall back to 105.7 region. 
  • Nonetheless, it is expected that Fed are going to raise rates. The tricky part for this FOMC will be how the dot plot is being adjusted and the projections of the economy after less than desired data since last policy meeting.

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