USD/JPY subdued close to 50DMA in 113.70 area as traders look ahead to Fed

• USD/JPY is contained close to its 50DMA around 113.70 ahead of Wednesday’s all-important Fed announcement.
• For the pair to enjoy a sustained rebound towards recent highs above 115.00, the US 10-year yield needs to rally.

USD/JPY is currently probing weekly highs in the 113.70 area, though the presence of the 50-day moving average at 113.70 continues to cap the price action, as has been the case for most of the last four sessions. Above the 50DMA resides the 21DMA at 113.90, a level which was well respected last week when the pair attempted a push on towards the 114.00 level.

A hotter than expected US Producer Price Inflation report gave USD/JPY some momentary support and is helping keep the pair supported to the north of the 113.50 level and above earlier session lows near 113.40, but has not been enough to stir a lasting move higher. The pari is taking its cue from the subdued tone being observed in US bonds markets, where most of the curve is flat. The 10-year yield, which USD/JPY is most sensitive to, is up about 1bps but remains below 1.45% and well below pre-Omicron levels nearer 1.70%.

The subdued tone of US bond markets and thus also of USD/JPY is unsurprising given the proximity of Wednesday’s Fed meeting. The bank is expected to pivot hawkishly by announcing a faster QE taper and indicate sooner lift-off with its updated dot plot. Ahead of the meeting, USD/JPY and bond markets may be a little jumpy on the release of the US November Retail Sales report and December NY Fed Manufacturing survey, but things are likely to remain contained.

That implies that USD/JPY will continue to trade within the 113.30-113.80ish ranges estabilished over the last few sessions. Whilst a more hawkish than expected Fed outcome might spur USD strength versus other G10 currencies, if it prompts further flattening of the US treasury curve and downside in longer-duration bond yields, JPY may hold up much better. If USD/JPY is to rally back to challenge recent highs in the 115.00s, US 10-year yields will need to push into the 1.60s% again.