On Wednesday October 30 at 6pm GMT, the FOMC will make public its latest interest rate decision. According to Daiwa Capital Markets, the financial markets have priced in a 90% probability of a 25bps insurance rate cut in tomorrow’s meeting. It is noteworthy that at this time, virtually no major central bank has a higher interest rate than the US Fed.
The Fed Chair and a few members of the board have also come out on several occasions to debunk ideas of the Fed entering a cycle of easing, preferring instead to maintain the step-wise approach to the easing cycle.
However, the idea of conducting the “insurance” cuts is starting to wear thin and experts feel that the time may have come for the Fed to do something more definitive. Prospects of a global economic slowdown are becoming greater by the day.
New pressures have emerged in the financial space, with the short term funding window for banks facing some recent stress. In September, the so-called repo rates rose at a point to as high as 10%, forcing the Fed to engage in emergency open market operations to provide an extra source of liquidity for banks.
Many experts believe that the Fed is reaching a point where rate cuts may no longer do the trick, and that the Fed may have to take more permanent steps at addressing the challenges in the repo market such as re- instituting the quantitative easing program.
Tomorrow’s rate statement will be an opportunity to see if the Fed is willing to address these pressures with more definitive steps or whether the Fed will be prepared to use measures it is already deploying for now.
Traders will have two opportunities to trade. First will be the rate decision proper, followed in 30 minutes by the statement to be issued by the Fed Chairman Jerome Powell. Following the statement, there will be a Q&A session with members of the press, and responses to questions bordering on the decision and further policy outlook will provide volatility for USD-denominated assets such as the USDJPY.
What should traders be looking out for? First will be the numbers. Traders will have to look out to see if the Fed will indeed cut interest rates or not, and if there is a cut, whether this will be done according to expectations or not.
The second part of the trade will be to trade the comments of the Fed Chair, on the basis of how dovish/hawkish those comments will be. More dovish comments could see a drop in the USDJPY, while less-than-dovish comments could see the USDJPY get some strong demand. Expect the Fed Chair to be pressed on what the Fed reserve will do to address the repo market pressures in the long-term.
The USDJPY continues to trade in a 100-pip range that has 108.40 (50% Fibonacci retracement) as the range floor, with the 108.95 short term resistance (July 9,10 and 31 as well as October 15 highs) acting as the range ceiling.
The 61.8% Fibonacci retracement level at 109.36 (Aug 1 high) remains the major resistance to beat. A less-than-dovish rate statement could push the USDJPY above this level to the May 21 high at 109.67 (78.6% Fibonacci level).
A dovish statement by the FOMC could cause the pair to push down below the 108.40 floor to target the next support level at 107.44 (July 3 and September 16 lows). Below this level, 106.84 (June 25 and October 8 lows) becomes the next relevant support target.