USD/JPY falters on rate hold and stock market volatility

<p>In the aftermath of the Fed’s non-action on Thursday, the US dollar continued to be pressured as equities reversed course and took a nosedive on […]</p>

In the aftermath of the Fed’s non-action on Thursday, the US dollar continued to be pressured as equities reversed course and took a nosedive on Friday morning. The stock market’s initial reaction to the Fed decision on Thursday was positive, especially during Fed Chair Janet Yellen’s press conference. But as traders digested her statements regarding a troubled global economy, fears and uncertainty once again took hold of the equity markets, helping to further prop up gold and the Japanese yen.

This combination of both a significantly weakened dollar due to the hold on US interest rates and trepidation in the global equity markets that has strengthened the yen, prompted a sharp drop for USD/JPY on Friday morning. Having already dropped below the 120.00 level on Thursday after the Fed statement, Friday morning saw a significant initial follow-through on that drop, hitting an intraday low approaching the 119.00 mark before paring some of those losses.

USD/JPY Daily Chart

 

As can be seen in August, the panic in the stock markets that was triggered in part by financial and economic turmoil in China saw a substantial corresponding surge in the yen, which translated into a dramatic plunge for USD/JPY. Could the current Fed-inspired anxiety over the global economy lead to a similar (or worse) drop in stocks and a further flight to gold and the yen? As of Friday, this scenario seems plausible.

From a technical perspective, USD/JPY has broken down below a large triangle consolidation pattern that had been in place since after the noted August plunge. Any continued fear over China and the global economy as reflected in the equity markets, has the potential to place further pressure on USD/JPY as the flight-to-safety mentality continues.

As the currency pair is currently trading just below the 120.00 level, any significant continuation of market volatility could prompt USD/JPY to fall back towards the 118.00 support level, with a further breakdown targeting a 115.50 support objective.

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