USD/JPY Fundamental Forecast – October 25, 2016

The U.S. Dollar rose against the Japanese Yen on growing expectations of a U.S. Federal Reserve interest rate hike in December and on increased demand for higher-yielding assets. The USD/JPY closed at 104.175, up 0.365 or 0.35%.

On Monday, bullish dollar traders reacted to positive economic news, while continuing to react to last week’s hawkish comments from several FOMC Members. According to the CME Group’s FedWatch program, traders see a nearly 70 percent chance of a Fed rate hike in December.

Preliminary Markit data on Monday showed the Flash Manufacturing PMI at 53.2, well above the 51.6 forecast and last month’s read at 51.5.

Also on Monday, St. Louis Federal Reserve President James Bullard said that a single U.S. interest rate hike would be all that was necessary for the time being, repeating comments he had made recently.

Bullard also said that low interest rates will likely be the norm during the next two to three years and that the U.S. is in a low-productivity growth regime, which is pressuring safe rates of return.

Bullard’s comments sound relatively calm compared to those of New York Fed President William Dudley, who said last week that the Fed will likely raise interest rates later this year if the U.S. economy remains on track. “If the economy stays on its current trajectory I think…we’ll see an interest rate hike later this year,” Dudley said.

Rising U.S. equity markets also helped boost the USD/JPY on Monday because they helped drive up demand for higher yielding assets. The Japanese Yen fell as a result because it is a funding currency.

In other news, the Japanese Trade Balance came in at 0.35T, higher than the 0.21T estimate. The previous result was increased to 0.36T. This news is actually considered good news for the currency. Flash Manufacturing PMI also came in higher than expected at 51.7 versus 50.6.

Forecast

There are no major economic releases from Japan on Tuesday and only one from the U.S. so the primary driver of the price action today will likely be the movement in the U.S. equity markets. Stronger demand for stocks will likely support the USD/JPY.

The key area on the chart is 104.629. This price stopped the rally earlier in the month. Taking it out could trigger a technical breakout with 105.166 the next likely target.

U.S. minor reports include the Home Price Index, the S&P/CS Composite-20 HPI, IBD/TIPP Economic Optimism and the Richmond Manufacturing Index. These reports should be watched, but don’t expect them to sway the Fed’s decision.

The major report is Conference Board Consumer Confidence at 1400 GMT. It is expected to come in at 101.5, lower than the previous 104.1. A lower than expected number could trigger an intraday reaction in the market, but the Fed won’t be swayed because it will probably be a one-time event related to worries over the election.