The pair has been quietly making waves since last week, as it continues the upside run upon breaking is 200-day moving average (blue line). The rally from 150.00 to just above 154.00 now also owes much to a surging rise in Treasury yields. 10-year yields have gone up from 4.15% to 4.40% during this period and that is also playing a role in keeping USD/JPY underpinned.
From a technical perspective, the pair is looking towards a test of the 155.00 mark now with the November high of 156.74 being a key resistance point.
But for trading this week, everything will hinge on the post-Fed reaction. In particular, how the dollar and the bond market will react.
The Fed is going to cut rates by 25 bps tomorrow. However, will they be explicit about a pause in January or even perhaps longer than that? That is the key question right now and traders will look for clues on that in the statement tomorrow as well as Powell's press conference.
Looking at Fed funds futures, the odds of a pause in January are ~80% at the moment while the odds of a rate cut in March are ~57%. There is a chance that the Fed might want to take it meeting by meeting but amid the move in bonds last week, traders are certainly not waiting around to find out.
So, will the Fed vindicate all of that? Or are they going to keep their options open and rein in the dollar? If it's the latter, we might be due a Santa Claus rally for risk assets this year.
