USD/JPY Fundamental Analysis – Forecast for the Week of October 24, 2016

Conflicting fundamental signals helped hold the U.S. Dollar and Japanese Yen is a tight range last week. The price action produced an inside move on the weekly chart that tends to indicate investor indecision and impending volatility.  The USD/JPY finished the week at 103.810, down 0.356 or -0.34%.

The USD/JPY weakened early in the week as investors digested comments from Fed Chair Janet Yellen on Friday, October 14. She said that the Fed may consider running a “high-pressure economy”. She also talked about the benefits of letting inflation run a little hotter than normal while allowing the unemployment rate to drop below the point that historically would trigger Fed tightening action.

U.S. Treasury yields dropped on the comments, taking down the U.S. Dollar against the Japanese Yen because Yellen’s comments were perceived as dovish. Essentially, what she is saying is that she favors a lower-for-long approach when it comes to interest rates. The Fed mandate is 2.0 percent inflation and a 5.0 percent unemployment rate. Yellen suggests letting inflation move slightly above the inflation and unemployment rate targets.

Yellen’s comments caused confusion amongst traders and investors and the USD/JPY weakened for several days. Also pressuring the U.S. Dollar was weaker than expected U.S. consumer inflation data. The CPI came in at 0.3% as expected, but the Core CPI came in at 0.1%, below the 0.2% estimate.

The combination of Yellen’s comments and the CPI data helped push the chances of a Fed rate hike in December from 70% to 65%.

Better-than-expected U.S. Building Permits data, Existing Home Sales and hawkish comments from FOMC members Stanley Fischer and William Dudley helped strengthen the U.S. Dollar by the end of the week. A steep drop in the Euro because of a dovish decision by the European Central Bank also helped drive the U.S. Dollar higher.

The outlook for a Fed rate hike increased on the news so at the end of the week, the probability of a December rate hike increased from a low of 65% earlier in the week to a high of 75%.

Forecast

This week begins with an upside bias due to last week’s strong finish. This could underpin the USD/JPY early in the week and put the Forex pair in a position to challenge the high for the month at 104.269. Taking out this price could trigger a rally into 105.166. A move through 103.187 will be the first sign of weakness while taking out 102.804 will turn the USD/JPY bearish again.

We could see the return of volatility on Monday with several Fed speakers scheduled to speak. The key report on Tuesday is the Conference Board’s Consumer Confidence.

Durable Goods and Unemployment claims could move the USD/JPY on Thursday.

The week ends with the U.S. Advance GDP report on Friday. It is expected to show the economy grew by 2.5%, up from last quarter’s 1.4% performance.

There are no major reports out of Japan. Minor reports include Tokyo Core CPI and Household Spending.

I’m going with the trend and predicting a strong rally by the USD/JPY this week especially if the FOMC members start the week with hawkish commentary that drives U.S. Treasury yields higher. Barring any major setback in global equity markets that could cause a flight to safety move into the Yen. It looks as if the U.S. Dollar will continue to rally due to the increasing odds of a rate hike by the end of the year.