USD in Range Ahead of FOMC

Dollar is still staying in tight range ahead of FOMC announcements. Markets expect Fed to leave the target federal funds rate unchanged at 5.25% today. While no substantial change is expected from minutes on the inflation part of the accompanying statement, focus will be on whether there are reference to recent financial turmoil and subprime mortgage market problems. Such reference could prompt speculation that Fed is building up for rate cut in second half of the year.

Sterling retreated sharply earlier today after BoE minutes revealed that the decision to hold rates at 5.25% earlier this month was made by a margin of 8 to 1, with David Blanchflower voted for a cut. Consensus expected a 7-2 vote. This has prompted markets to scale back expectation that BoE will hike again in Apr. Though it’s still widely expected that BoE will hike again within Q2. Said in his annual budget to Parliament, UK Chancellor of the Exchequer Gordon Brown predicted that UK economy will grow quicker in 07 by 3.25%, and 3% in 08, which is inline with his Dec forecasts.

Canadian dollar continues to strengthen against dollar even though retail sales came in slightly below expectation. Retail sales dropped -0.2% mom in Jan, comparing to expectation of -0.1% while prior months growth was revised down from 2.3% to 2.2%. ex-auto sales increased 0.3%, inline with expectation but prior months’ growth was also revised down from 2.0% to 1.9%.


Daily Pivots: (S1) 116.79; (P) 117.40; (R1) 117.89; More

Outlook remains unchanged as USD/JPY continues to engage in choppy consolidation. The fall from 122.17 should have made a short term low at 115.13. And hence further consolidation is expected to follow. But upside should be limited by 100% projection of 115.13 to 118.49 from 115.75 at 119.10 and bring another fall.

On the downside, further consolidation cannot be ruled out as long as USD/JPY stays above 115.75 support. But a break there will encourage a retest of 115.13 low and break will confirm that fall from 121.61 has resumed for next downside target of 114.02/41 support zone (61.8% retracement of 108.99 to 122.17 at 114.02).

In the bigger picture, our view remains unchanged. Previous break of medium term rising channel support (108.99, 114.41, 117.87) indicates the whole up trend from 108.99 has completed at 122.17. Weekly MACD’s stay below signal line is still supporting this. The corrective nature of the rise from 108.99 swings favors back to the case that such medium term rally is merely part of a large scale consolidation that started at 121.38, with first leg completed at 108.99 and second leg completed at 122.17. The fall from 121.17 should then the third leg of such consolidation and deeper decline should at least be seen to below 114.02/41 support zone (61.8% retracement of 108.99 to 122.17 at 114.02) first with much possibility of further fall to retest 108.99 low.

However, decisive break of 119.48 fibo resistance will argue that the price actions from 122.17 is developing into large range consolidation instead. A retest of 122.17 high could be seen in such case. But still, firm break above this resistance is needed to confirm medium term rally from 108.99 has resumed. Otherwise, medium term outlook will be neutral at best.

USD/JPY 4 Hours Chart - Forex Newsletters, Forex Outlook, Forex Review, Forex Signal

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Shing-Ip Tsui is the founder and CEO of ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.