USD/JPY rallies to 112.58: FOMC left rates unchanged and dollar firms

Currently, USD/JPY is trading at 112.53, up 0.48% on the day, having posted a daily high at 112.56 and low at 111.96.

• FOMC's decisions regarding monetary policy implementation - May 3, 2017

The JPY has been soft, although in a tight range on late due to the holiday's in Japan that started overnight. Markets have been building up to today's main event in the FOMC  while the dollar got an early boost today from the positives in the  ADP employment and ISM non-manufacturing index.

"JPY appears to be weakening beyond levels implied by spreads at both the short and longer end of the curve, opening up some risk of readjustment. Options markets appear to be pricing a relatively low premium for protection against upside risk, leaving JPY vulnerable in the event of an upswing in risk aversion," explained analysts at the open earlier today from Scotiabank who remain fundamentally bearish JPY with a USDJPY Q2 target of 115. " However we are somewhat concerned on the basis of near-term risk and JPY’s vulnerability to knee-jerk haven-driven gains in periods of risk aversion."

• Fed leaves interest rates unchanged at May meeting

USD/JPY has been running higher in expectations of a rate hike in June and today's statement from the FOMC, although leaving rates on hold, was BULLISH/HAWKISH, despite the recent data that has been viewed as transitory.

At initial glance, here are the main takeaways from the FOMC were as follows:

• Fed keeps rates unchanged at 0.75%-1.00% as expected.
• The decision was unchanged and unanimous.
• Slow down in GDPQ1 is viewed as transitory.
• Expects the economy to grow at a moderate pace.
• Fundamental consumption growth remains solid.
• Economy roughly balanced.
• Household spending up modestly.
• 12-month inflation running close to its 2% goal.

USD/JPY levels

The analysts at Scotiabank noted that the USD/JPY short-term technicals are bullish. "USD/JPY is trading at the upper end of its one month range just below Tuesday’s fresh high, its gains confirmed by both trend and momentum indicators. We continue to highlight the importance of the December-April decline and its major retracement levels, specifically the 38.2% Fibo at 112.15."

A test of the upside towards the 113.00 handle, analysts at Commerzbank suggested it would hold the initial test. "We will need to clear this to set up a run at the 115.51/62 mid-January high. Intraday Elliott waves counts suggest that we should allow for a retracement to 110.72."