USDJPY W1 16-03

At this stage, the Fed has little propensity to surprise on the rate decision today. When markets wanted to run with a 50 bps pricing, they pulled it back and boxed themselves into a 25 bps move later. It would be a big surprise if they do actually hike by 50 bps today but perhaps not entirely unexpected.

As things stand, I would argue that the baseline expectation is that the market is looking for the Fed to position more hawkishly.

This comes as inflation continues to run through the roof and bond yields are also surging as a result. We're seeing Treasury yields hold at multi-year highs with 10-year yields earlier briefly touching 2.20%.

In turn, that is underpinning USD/JPY in a push above 118.00 this week. So, what's next for the pair?

From a fundamental perspective, it is all up to the Fed now. If they tee up QT and more hawkish prospects of a 50 bps rate move in May or June, that could be a strong catalyst for USD/JPY to push higher. That will just continue to amplify the divergence between the Fed and BOJ policies.

As for a technical point of view, the highs in December 2016 and January 2017 @ 118.61-66 will be a key one to watch but be wary that there is talk of buy stops layered around 118.50. As such, a swift break above those levels could see USD/JPY jump much higher towards 119.00.

Should that be the case, there is little stopping the pair from a push towards the psychological level of 120.00 next.

The thing to also be aware of here is that no matter what the Fed says or does today, it isn't going to change the inflation conundrum. The Russia-Ukraine situation and China lockdowns are additional issues that they cannot resolve with monetary policy and that will add to the headache in the months to come.

As such, they may have little choice but to be more hawkish but at the same time, they are also going to have to balance out that rhetoric and stagflation risks as economic conditions start to grind slower and weaker in the next few quarters.