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The chart above demonstrates the strengthening of the Yen vs the US Dollar since the BOJ 29 January action. It’s unusual since the BOJ action should have weakened the Yen against the Dollar, especially when some Fed officials have been talking up the ‘live’ June meeting.  It’s particularly unusual since the Yen has also gained on the US Dollar index when the central banks of every currency in the basket have accommodative policies in place; i.e., the Yen seems to be overbought against the index as well as USD. Although the Yen has weakened against the US Dollar from its 3 May one year high of ¥106.309 back to ¥110.22, a decline of about 3.548%, it’s still off its 52 week low of ¥125.051 by nearly 12%.

The next BOJ meeting coincides with the next FOMC meeting 16 June, (plus an 11 hour time difference). What are the possibilities? A stronger US Dollar would be a great favor for the BOJ. However, in light of the above premise, the likelihood of a Fed action may actually be far less than what markets have recently priced in. A stronger US Dollar vs Yen will have little benefit for the Japanese economy if US consumers reduce spending. The most likely scenario is for the BOJ to act to some degree, while the Fed maintains policy. If this is the case, the Yen should continue to weaken against the Dollar. On the other hand, should the BOJ disappoint, upside gains vs the Dollar will be limited by speculation that the Fed will act at the next meeting, 26-27 July. Lastly, it’s worth keeping in mind that BOJ Governor Kuroda seems to have a knack for surprising markets.   

Fed, Yen, Pound, Funadamental Analysis, fx trader, forex GBP USD Price Event ChartGBP/USD Price Event Chart

A second potentially volatile trade is USD/GBP. The Brexit debate and the close poll numbers have been creating a lot of uncertainty in the UK economy and indeed, perhaps even slowing it10.  The UK economy has been one of the best performing economies in the EU if not globally. However, the ONS recently reported a slowdown in growth; 0.4% in Q1 vs 0.6% in Q4 of 2015. The slowdown may be also affecting job growth and wage gains11; the ONS reported it as a “cooling off” in jobs data. It’s important to note that like the US, UK employment is near record highs. The point of the matter is that the Bank of England would have to act immediately and decisively, should the UK ‘exeunt’ the EU stage. The market reaction is likely to be a sharp weakening of Sterling vs the US Dollar, particularly in a short term flight to safety trade.  Should the Fed raise rates in front of the vote, it creates a risk of even higher prices for dollar related commodities ahead of the vote, for one example energy prices. Also, it need not be the vote itself, but rather the ensuing economic chaos which might tip the UK applecart. Indeed, there is a recession risk. As much as the Fed would never admit it, they simply could not ignore the consequences of the potential chaos in the aftermath of the vote. So again, under the premise of no Fed action, Sterling seems likely to weaken against the US Dollar as the vote draws nigh. One caveat would be poll numbers. If the polls indicate a clear ‘stay’ victory, Sterling upside against the US Dollar might be limited by speculation on the Fed’s July meeting.

In conclusion, in spite of the public analysis and rhetoric, the FOMC is well aware of all the risk in raising lending rates, even if the across the board effects are minimal. The consequences which an increase might have on export demand, manufacturing, automobile sales and the ‘bust’ in the US petroleum mining sector might be enough to cause the FOMC to proceed with caution and postpone in June.

Mike Scrive
Technical Analyst
Accendo Markets

CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

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1 US Fed Press Release 19/5/2016; well worth reading
2 Wikinvest
3 For those who wish to understand the details: US Federal Reserve Publication
4 Federal Reserve Bank of San Francisco Economic Research
5 The Telegraph 13-5-2016
6 CNBC 18-5-2016
7 USA Today 24-4-2016
8 Reuters 4-5-2016
9 Reuters 17-5-2016
10 Reuters 27-4-2016
11 BBC 18-5-2016