As the markets await the conclusion of June’s FOMC meeting and the resulting monetary policy statement scheduled for Wednesday, the US dollar has remained in a much-weakened state against the Japanese yen. Both the yen and dollar have been supported most recently by a general risk-off market environment ahead of the UK’s pivotal EU referendum next week, but the safe haven Japanese currency has continued to assume a commanding lead against its major currency rivals.
The Fed is widely expected to keep rates on hold on Wednesday, as recent US employment data severely disappointed expectations and the risk of a UK vote to leave the European Union ("Brexit") next week continues to weigh on the Fed’s monetary tightening aims. Though US retail sales data for May came out on Tuesday better-than-forecast at +0.5% vs the +0.4% anticipated, this alone cannot be expected to offset the dismal non-farm payrolls numbers released in the beginning of the month (38,000 jobs added for May vs 160,000 expected). The Fed Fund futures market currently continues to show an extremely low implied probability of a Fed rate hike on Wednesday – below 2%.
Aside from the FOMC decision this week and the EU referendum next week, USD/JPY traders have also been waiting in heightened anticipation of the Bank of Japan’s (BoJ) monetary policy statement and press conference scheduled for Thursday in Japan. These communications from the BoJ could provide some indications of whether the central bank may act in attempts to stem the substantial strengthening of its currency in recent weeks and months.
As the dollar has been weakening due to the sharp decline in expectations for a near-term Fed rate hike and the Japanese yen has continued to strengthen partly due to safe-haven buying ahead of next week’s Brexit risk event, USD/JPY has been pressured down to a key support level around 105.50. This level is in the close vicinity of early May’s long-term low, a level that USD/JPY had not previously seen since late 2014. In the event of further US dollar weakness after Wednesday’s FOMC decision and increasing yen-strength ahead of next week’s Brexit risk event, a strong breakdown below the noted 105.50 support area could open the way for further USD/JPY losses towards the next major downside targets at the 103.00 and then 101.00 support levels.