BUZZ-COMMENT-USD/JPY bears may look to Fed as next catalyst

Yen bulls have gotten most of what they can from the recent move lower in USD/JPY without a new catalyst, and, given rising apprehension about a potential U.S. growth slowdown, it will probably take a shift in Fed expectations to provide new impetus.

Currently, markets see an 80% chance of a 25 basis point Fed rate cut in June, a significant drop from two weeks ago. Odds of a cut at the May meeting, now around 25%, could increase if U.S. data continues to disappoint or if market-based inflation expectations ease. While Friday's PCE report for January is in focus, $70 oil and a two-month low in U.S. inflation breakevens indicate that price pressures are already diminishing.

Market movements reflect a growing link between USD/JPY and Fed policy expectations. The relationship between USD/JPY and Treasury 2-year yields has been strengthening since Feb. 20, a date that coincides with the S&P's downturn. Changes in the pair are also closely linked to shifts in the broader dollar index, suggesting that Bank of Japan policy tightening is not currently a factor in yen movements. This could change if Tokyo CPI data on Friday exceeds expectations.

Until Friday's data, USD/JPY bears may look to adjust or exit short positions and reenter at higher levels. Key resistance is seen at 150.93 -- the Feb. 7 low) and the prior pivot level at 152.

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