USDJPY PRICE VOLATILITY SPIKING AROUND JACKSON HOLE, FED COMMENTARY

The US Dollar is in focus as forex traders turn attention to Jackson Hole and Fed interest rate expectations

USDJPY implied volatility could creep higher in the coming days as USD price action heats up in response to the latest FOMC commentary

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US Dollar price action and FOMC member commentary is front and center with the kickoff of the Federal Reserve of Kansas City’s annual Jackson Hole Economic Symposium today. Forex traders and equity investors alike have anxiously awaited clarity from Fed Chair Powell and other central bank officials on US economic outlook and the future path of monetary policy decisions, which will likely be laid out over the coming days.

Markets have wrestled over what to anticipate from upcoming Federal Reserve meetings as interest rate cut expectations gyrate in response to US-China trade war developments – like Trump’s tariff whiplash – and mounting recession fears in light of the recent 2s10s yield curve inversion. That said, Fed commentary out of Jackson Hole stands to unriddle ambiguity surrounding where interest rates – and the US Dollar – might head next.

FEDERAL RESERVE INTEREST RATE RANGE PROBABILITIES (DECEMBER 2019)

According to overnight swaps pricing, expectations are near-split between another 50-basis points and 75-basis points of interest rate cuts by year-end. Although Fed Chair Powell and the July FOMC minutes labeled the latest interest rate cut as a “mid-cycle adjustment,” markets seem unconvinced in light of US-China trade war uncertainty and its adverse impact on consumer sentiment, inflation, business investment and global GDP growth forecasts.

USDJPY 25-DELTA RISK REVERSAL (1-WEEK)

If Powell and other voting FOMC members hint at a reluctance to provide additional monetary policy accommodation, lofty rate cut bets could be in for a violent repricing which stands to shoot the US Dollar higher and risk-assets lower. Yet, recent changes in USDJPY risk reversal measures suggests that currency option traders have a downside bias over the next week as USDJPY put option volatility premium continues to outweigh that of calls indicated by a reading below 0.

USDJPY PRICE CHART: DAILY TIME FRAME (DECEMBER 28, 2018 TO AUGUST 22, 2019)

Turning to the charts, spot USDJPY has struggled to reclaim the 106.50 price level after sinking below this level earlier this month. Technical resistance posed by the 76.4% Fibonacci retracement of spot USDJPY’s year-to-date trading range has also hindered the currency pair’s ability to claw back recent downside. That said, spot USDJPY price action is estimated to fluctuate between 105.52-107.45 over the next week with a 68% statistical probability which is calculated using the latest reading on USDJPY 1-week implied volatility of 7.77%.

USDJPY PRICE CHART: 4-HOUR TIME FRAME (JULY 30, 2019 TO AUGUST 22, 2019)

Zooming in on a closer time frame, the 4-hour spot USDJPY chart reveals forex trader’s indecision on where the currency pair might head next as price action consolidates in a tight range. Immediate technical support and resistance appear around the 23.6% and 38.2% Fibonacci retracement levels respectively of spot USDJPY’s July 31 high. Breaking above or below the aforementioned confluence could extend onward to test the upper or lower bounds of the option-implied trading range.

Although, spot USDJPY upside could run out of steam around the 107.00 handle around the 50% retracement of August’s trading range. Also, looking beyond Jackson Hole, another blow to risk appetite could potentially push spot USDJPY below the option-implied trading range toward a retest of year-to-date lows near the 105.00 price level.

USDJPY – IG CLIENT SENTIMENT INDEX: DAILY TIME FRAME (FEBRUARY 25, 2019 TO AUGUST 22, 2019)

IG Client Sentiment data on USDJPY could also provide forex traders with insight on the currency pair’s next direction. The latest figures reveal that 65.7% of USDJPY retail traders are net-long resulting in a long-to-short ratio of 1.91 to 1. Moreover, the number of traders net-long is 1.0% higher than last week whereas the number of traders net short is 29.0% higher than yesterday. Seeing that we typically take a contrarian view to crowd sentiment and the fact that USDJPY retail traders remain net-long suggests that spot prices may continue to fall.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight