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USD/JPY recovers from FOMC induced losses

The USD has managed to quickly erase yesterday's decline as the bull market remains intact.

During FOMC Chairman Jerome Powell’s news conference on Wednesday, the greenback came under severe selling pressure, sending the US Dollar Index down about 1%, its worst one-day loss since early March.

However, on Thursday, the situation was the opposite – traders bought the dip, erasing most of the losses and pushing the USD/JPY pair back toward the significant 130 threshold.

Fed delivered a 50bps rate increase

The Federal Reserve raised interest rates by 50 basis points (0.5%) for the first time since 2000, signaling a significant step toward addressing inflation, which is at its highest level in 40 years. In addition, starting June 1, the central bank aims to begin reducing its 9 trillion USD balance sheet. The amount of this stated balance sheet shrinkage was substantially in line with Wall Street’s expectations – starting with a 47.5 billion USD monthly outflow cap and increasing to 95 billion USD after three months.

But, more crucially, during his press conference on Thursday, Fed Chair Jerome Powell said that the central bank was not actively considering plans to raise the fed funds rate by 75 basis points in the near future. Some warned that such a step would give the economy too much of a hurdle at a time when it was already declining. Despite this, Powell stated that “a widespread view within the committee” was that “further 50 basis point rises should be on the table at the next few meetings.”

You may also read: Fed declares war on inflation and raises interest rates

Furthermore, the markets are still pricing in a 200-basis-point rise for the rest of 2022, with 50-basis-point hikes at the subsequent four FOMC policy sessions.

According to Westpac analysts, sell-the-fact on the Federal Reserve’s 50bps raise is unlikely to represent a trend change as Fed officials hit the wires and NFP and CPI underscore the need for more 50bps hikes.

“Payrolls is a wildcard as ever but shouldn’t alter the basic picture of a robust labor market, a point Fed officials will emphasize in coming days in the usual flurry of post-meeting media appearances.”

Consolidation likely

It looks like the following days could bring some consolidation to the markets. However, there is a similar bullish flag pattern on the chart, probably leading to further gains if we see a bullish breakout. The next resistance should be in the 131 region.

On the downside, if the dollar drops below 129.00/128.80, a more considerable decline could occur, targeting 127.00 in the initial reaction.

USD/JPY 4-hour chart, Source: Author´s analysis, tradingview.com

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