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Forex pairs in this Article » USD/JPY (London) - USD/JPY continues its bullish momentum ahead of the release of the FOMC’s December minutes today. The pair is currently trading at JPY105.0550 with last week’s 5-year USD/JPY high of JPY105.4415 in sight.

Looking for future Fed policy

The minutes from the December meeting will be under close scrutiny following the Fed’s decision to taper its monthly asset purchases by USD10bn. The programme remains as USD75bn a month and it is expected that the Fed will continue to taper its asset purchases at successive meetings, winding up its latest incarnation of quantitative easing by the end of 2014.

The biggest focus will be on proposed measures to replace QE. Janet Yellen, confirmed by the US Senate this week as the successor to Ben Bernanke when he stands down from the chairmanship of the Fed on 31 January, has been perhaps the biggest proponent of forward-guidance at the Fed and for increased Fed transparency. However, the forward guidance issued with the Fed’s December decision thin on the ground - to keep rates lower well past the time that the unemployment rate declines below 6.5 percent. The minutes will be scrutinised for clues as to how the Fed will move to draw down rates if they begin to rise too quickly for the US economic recovery. The Fed may potentially leave the door open to the Fed paying interest on excess reserve balances (IOER) which would effectively act as a floor on the overnight rate. However such a policy move may be hampered by the Fed’s very high levels of excess reserves.

Diverging monetary policy

USD/JPY has been driven by diverging monetary policy expectations and the returning bullish momentum from the pair could put last week’s 5-year high of JPY105.4415 under pressure. While the US is in the process of rolling back its asset purchases, Japan continues full steam ahead with its current programme of JPY7 trillion of bond purchases a month as it targets 2 percent inflation and to snap out of its long deflationary spiral. While the Bank of Japan has stated that it is not intervening in the currency, the recent yen weakness has helped import some inflation into the Japanese economy through rising prices for imported goods.

USD/JPY 5-year high within touching distance

USD/JPY is currently trading at JPY105.0550, up 0.35 percent on the session so far after an open of JPY104.6385.
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