Will FOMC Drive USD/JPY Below 105?

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Market Drivers June 15, 2016

UK Labor data improves
Risk returns
Nikkei 0.38% Dax 1.02%
Oil $47/bbl
Gold $1285/oz.

Europe and Asia:
GBP Unemployment at 5.0% vs. 5.1%
EUR Trade Balance 28B vs. 21B

North America:
USD Empire Manufacturing 8:30
USD FOMC 14:00

Cable was firmer in morning London trade today after UK labor proved better than expected sending the pair above the 1.4200 mark as traders took a breather from Brexit polls.

UK Labor data beat on all fronts with unemployment rate coming in 5.0% versus 5.1% eyed while claimant count figures printed at -0.4K versus -0.1K forecast. Most importantly average earnings improved to 2.0% from 1.7% predicted which suggests that income growth in UK is expanding at a healthy pace.

The data was welcome news to pound bulls who have seen UK economy decelerate over the past few months on fears of Brexit. The risk of UK leaving the EU still remains significant and the latest swirl of polls suggests that vote is too close to call, but should UK economy survive the Brexit vote, the underlying fundamentals appear to have been relatively unscathed by the political trauma and cable could pop substantially on a Remain win.

Today, however the focus in FX will shift to this side of the Atlantic as the Fed will release its monthly FOMC statement and rate decision. While no one expects the Fed to do anything this month the key factor in today’s release will be the tone of the language with respect to next month’s meeting.

No doubt Ms. Yellen and company will make references to the current turbulence caused by the Brexit vote as part of the reason for their cautious approach, but if they look past this event and suggest that US economy continues to expand at a healthy pace, the market expectations for a Fed hike in July may increase markedly especially if next month’s NFPs show a rebound in jobs.

We have long argued that the Fed’s last chance to raise rates before the US Presidential election will be in July. After that the FOMC officials are likely to stand down. Although the Fed is a non-political body it will be loathe to get involved in what is turning out to be one of the most partisan campaigns in US history and will likely remain on hold until December.

That’s why today’s decision will be scrutinized carefully for any nuance in language and the volatility in pairs could pick up markedly. Most importantly will be the 105.50 level in USD/JPY. If the Fed proves dovish the yearly low will likely fall by the wayside and 105.00 will be tested as the day proceeds.

Boris Schlossberg
Managing Director

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