Dollar Bulls on High Alert as FOMC Meeting Tests USD/JPY
The US dollar is expected to be under scrutiny at this week's Federal Reserve meeting as the USD/JPY exchange rate nears intervention territory. With the US Dollar Index pressing against its March high, a hawkish outcome could provide the catalyst for a fresh breakout, potentially prompting Japan's Ministry of Finance (MOF) to intervene in the market.
Fed funds futures imply near certainty that rates will remain unchanged at the meeting, with a 99% implied probability of a hold. The first move is expected to be a 25bp hike in December, although the probability currently stands at just 49%. Any changes to the dot plot and Fed funds forecasts will be among the first details traders scrutinise.
USD/JPY is already trading above the May 6 intervention level just below 158 and is close to retesting the April 30 high near 160.70, making it a safe bet that today's FOMC meeting is firmly on the MOF's radar. However, their hands are tied as trying to support the yen in the face of aggressive bullish US dollar bets would not be wise.
The risks appear skewed towards a hawkish outcome from both the statement and the dot plot, which could provide support for the US dollar. Whether the US dollar can hold onto those gains will then depend on the hawkishness of Warsh's press conference.