Trading has turned choppy in the FX markets. Earlier in the day the Bank of Japan released their monetary policy and while they kept their negative interest rate in place, they did start to manipulate their broader stimulus package and change what have been static goals regarding inflation. The BoJ has also made changes to what it hopes will make a difference in yield curves for ten year bonds and longer.
Initially the JPY traded weaker upon the release of implementations from the BoJ, and the Nikkei and other Asian Indices gained in a rapid manner after a week of very mediocre results. But as the day has progressed the JPY has gotten stronger and actually surpassed the value points that it was traversing before the Bank of Japan decision.
This strength in the JPY will not be welcomed news by the Japanese government, which wants and needs a weaker JPY in order to boost the economy and make the Japan export market more alluring for buyers. When Asian traders return back to their offices on early Thursday, the JPY will be ready to be tested again.
The Fed will join the monetary policy parade in a handful of hours. The Fed is not expected to raise interest rates today. There are murmurs from some bank analysts and investors that the Fed will launch a surprise interest rate hike, but the probability of that occurring in reality appears limited.
A battle may rage between bulls and doves during the FOMC meeting today in Washington, D.C., but U.S. economic data has not matched the strong rhetoric from the Fed. Yesterday Building Permits and Housing Starts added to the recently found Pandora box of ill-fated data results.
If the Fed were to actually raise its interest rate later today it would create a tidal wave of impetus, but it may not be the reaction the central bank is looking for from investors. Since the days of Ben Bernanke being in charge of the Federal Reserve up until this current day with Chairwoman Janet Yellen, the Fed has not implemented a surprise interest rate hike.
If the FOMC Statement holds its cautious line, it will be a compelling read for any subtle changes in tone regarding economic outlook. While many investors agree that the Fed will raise rates in December of this year, the question is what the political and economic landscape will look like.
While only a few months away, there is a rather important election for the White House that not only has to take place, but its result could prove highly dynamic particularly if Donald Trump were to win. Global economic events between now and December may also prove noteworthy and create other headwinds for the Federal Reserve.
The momentum of the USD the past couple of days versus both the Sterling and Single Currency is of interest short-term. The GBP and EUR have lost value against the USD and have set themselves up for opportunistic trading if the Fed does not raise its interest rate today. Yes, both the Sterling and Single Currency have many questions that their respective governments and central banks must consider, but from a short-term perspective both currencies may be oversold due to negative market sentiment surrounding the potential of a Fed interest rate hike.
FX markets are likely to practice consolidated ranges the next few hours, but sometime before 6:00 PM GMT, the USD and major FX pairs will shift into high gear and traders will need to be ready for what could prove to be intense whipsaw trading.