USD/JPY Fundamental Forecast – October 21, 2016

The U.S. Dollar mounted a strong comeback against the Japanese Yen on Thursday as investors reacted to the European Central Bank’s decision on tapering its stimulus.

ECB Policymakers drove the Euro lower and the dollar higher after they decided to leave interest rates and the current stimulus package intact while signaling it may extend their program of bond purchases beyond its scheduled expiration in March, but without offering a clear commitment to do so. ‘

Draghi said an “abrupt ending” to bond purchases is “unlikely,” and said a decision would be made at the governing council’s December 8 meeting. He further added, “It’s quite clear our decisions in December will tell you what we are going to do in the coming months,” he said.

In economic news, U.S. home resales surged in December after two straight months of declines. This helped drive up expectations for a U.S. Federal Reserve rate hike in December.

Other data showed that weekly unemployment claims rose more than expected to 260,000 last week. However, traders still feel the labor market is strong.

At the end of the session, the Fed Funds Indicator showed a 67% chance of a rate hike in December. This is up from 65% earlier in the week, but down from last week’s 70% read.

The USD/JPY closed at 103.944, up 0.504 up 0.49%.

Forecast

Thursday’s rally by the USD/JPY was driven mostly by the stronger dollar which was supported by the sharp sell-off by the Euro and the ECB’s decision to possibly extend its stimulus.

The dollar’s strength was not helped by U.S. Treasury yields which finished mixed.

In my opinion, if the USD/JPY is going to sustain its current rally then it is going to have to get help to drive the Forex pair over last week’s high at 104.629. This help will likely come in the form of rising Treasury yields.

If yields start to rise again then traders are likely to go after this high. If the buying is strong enough then the rally could extend into 105.166 over the near-term.

Without help from the Treasury yields then all it is going to take is a short-covering rally by the Euro to put pressure on the Dollar once again.