FX Watch: FOMC and BoJ meetings to mark the final key risk events of 2024

Overview

This week, market participants took a more defensive stance, in anticipation of potential policy signals from the upcoming Federal Reserve (Fed) meeting, which will be the second-to-last key risk event of the year. The last being the Bank of Japan (BoJ) meeting, which will follow hours later.

Market expectations are firmly aligned for a 25 basis point (bp) rate cut from the Fed, with the move motivated by a desire to gradually return rates to neutral (likely around 3.0%, based on the Fed’s long-term rate projections). This comes as the unemployment rate trends higher, while the persistent lack of progress on inflation still justifies a measured approach for now.

Key insights will be drawn from the Fed’s updated dot plot and economic projections, which could signal a shift toward a more conservative rate-cutting cycle—perhaps from four cuts to three—aligned with current market rate pricing. Upward revisions to inflation and growth forecasts will also be closely watched, potentially reinforcing the need for patience in delivering future cuts.

US Dollar Index: Resilience amid less-hawkish Fed rate bets

Any hawkish tilt from the Fed could lend support to the US dollar, though current market pricing already reflects an 80% probability of a rate hold in January and cumulative 75 bp worth of cuts through 2025. This, combined with weaker year-end seasonality, may cap the extent of further gains.

After a 2.5% pullback since November 2024, the technical conditions for the US dollar have returned to more neutral territory. Its daily relative strength index (RSI) has moderated back to its midline at 50, which was met with some support. A potential head-and-shoulders pattern failed to materialise, as the US dollar found a firm footing at the 105.12 level — a resistance-turned-support trendline.

Looking ahead, the immediate focus will be on the 106.88 horizontal resistance, a level that has constrained the dollar on at least three occasions. A breakout above this level could pave the way toward the next target at 107.80, which corresponds to the November 22 high.

EUR/USD: Minor inverse head-and-shoulder still needs validation

The recent European Central Bank (ECB) meeting may have been largely a non-event, while some improvement in Eurozone services activity has offered stability to the EUR/USD, which had previously fallen as much as 7.8% since October 2024.

A minor inverse head-and-shoulders pattern appears to be forming, but confirmation hinges on a breakout above the December 6 high at the 1.062 level. That said, its daily RSI remains a concern, having failed to reclaim the midline on two previous attempts since October—highlighting that sellers still maintain broader control.

If the EUR/USD fails to breach the 1.062 level, the pair may drift lower toward its year-to-date low at 1.033, keeping downside risks in focus.

USD/JPY: Fading BoJ rate-hike bets weigh on yen

Diminished expectations for a December rate hike from the BoJ have contributed to recent yen weakness, while a widening US-Japan bond yield differential continues to support USD/JPY strength.

With wide consensus for the BoJ to keep rates on hold this week, attention will shift to any signals that set the stage for a potential January hike, especially as recent price-wage dynamics seem to fall in line with the ‘sustained wages-driven inflation’ policymakers are seeking.

Technically, USD/JPY remains within a rising channel, having recently rebounded from its lower trendline near the 149.20 level. Upward momentum is gaining traction, with the daily RSI climbing back above its midline and a bullish crossover forming on the daily moving average convergence/divergence (MACD). However, a downward trendline resistance could challenge further gains. A decisive break above the 156.20 level would be needed to strengthen bullish conviction.