The very immediate-term outlook for USD/JPY is clouded by the interet rate decision from the Federal Reserve and Bank of Japan. We see the potential for a pop but will be using it to sell strength.

The Fed decides at 2:15 p.m. ET on Tuesday while the Bank of Japan will announce interest rate decision about 10 hours later. 

Neither is expected change interest rates but they could send signals that ignite the market. On Tuesday, the Federal Reserve could remove the “extended period” wording from the statement or alter it to something that shows a rate hike may no longer be in the distant future. This would be a positive for the U.S. dollar. On the other side of the Pacific, there is speculation that the Bank of Japan may announce further special measures to fight deflation, like bond purchases, when officials meet Wednesday. This would be an explicit move that devalues the JPY.  The combination of the two meetings could make for a big USD/JPY move.

From a fundamental point of view, we can see macros getting long USD/JPY. They are seeing the opportunity for a quick profit if the FOMC signals tighter policy and/or the BoJ increases bond purchases. We doubt the Fed is going to signal anything meaningful and we don’t believe that a more upbeat economic assessment and/or altering of the “extended period” language is enough to generate a lasting U.S. rally. There is some risk from the BoJ because a move to further bond purchases would be a JPY negative but we see this as unlikely.

When neither of these expectations come to pass, we will see a round of position squaring from speculators that hurts USD/JPY and furthers the technical structure of lower highs. The slow stochastic is also flashing a sell signal.

We will target 87.50 with a stop at 92.15.