Tomorrow we have the Federal Reserve’s second to last monetary policy announcement of the year and while no changes are expected, they are widely expected to set the stage for a year-end rate hike. The U.S. dollar is trading firmly against most of the major currencies ahead of this key event and if the Fed is sufficiently hawkish, we will see USD/JPY above 114 and possibly even near 115. Fed fund futures show the market pricing in 0% chance of tightening in November and 85% chance of a hike in December. Therefore the Fed needs to be unambiguously hawkish in order to avoid a sell-off in the dollar. If anyone dissents and favors an immediate tightening, the dollar will rise with USD/JPY taking aim at 115 if there are 2 or more dissents. There has been widespread improvements in the U.S. economy since the last Fed meeting and with the progress being made on tax reform and stocks hovering at or near record highs, there’s plenty of reasons to justify a hike. Consumer spending and consumer confidence is up, average hourly earnings increased significantly in September, inflation increased with improvements seen in manufacturing and service sector activity.

For all of these reasons we believe that the dollar will rise into and on the back of the FOMC rate decision. Unlike last month’s meeting when a press conference followed the rate decision this time we only have the FOMC statement. But that can still be enough to excite dollar bulls. We’re looking for a move up to 114.50 on the back of FOMC but if there are a number of hawkish dissents, we may even see the pair break 115. There’s no question that investors are bullish dollars ahead of this event so in the unlikely chance that the Fed raises fresh concerns, giving investors reason to believe that next month’s hike will be a dovish one, USD/JPY will fall quickly and aggressively and the unwind could take the pair as low as 112 in the hours to follow.