USD/JPY Fundamental Forecast – October 26, 2016

After spiking up into its highest level since July 29, the U.S. Dollar weakened against the Japanese Yen to close lower at the end of the session. Early in the session, the USD/JPY took out the October 13 main top at 104.629, triggering a surge into resistance at 104.867. However, the buying dried up and sellers drove the Forex pair lower into the close to finish at 104.208, up 0.033 or +0.3%.

The initial rally was fueled by growing expectations that the Federal Reserve would raise interest rates in December. Traders increased the chances of a rate hike from 74% to 78% percent. However, this wasn’t enough to sustain the rally as sellers overwhelmed the buyers.

The U.S. Dollar began to weaken following the release of a disappointing U.S. consumer confidence report. It showed a read of 98.6, missing badly the 101.5 estimate.

Also helping to weaken the U.S. Dollar were mixed U.S. government debt prices. The yields on the 10-year Treasury Note and 30-year Treasury Bond were down, but Two-year Note yields rose.

Finally, a sell-off in the U.S. equity indices triggered a flight to safety rally with investors moving money into the safety of the Japanese Yen during the latter half of the day.

Forecast

On Wednesday, USD/JPY investors will focus on Treasury yields and demand for higher-yielding assets. Weakening Treasury yields and lower demand for higher-yielding assets will be bullish for the Japanese Yen.

Today’s early report is the Services Producer Price Index (SPPI). The report, due out at 2350 GMT, is expected to come in at 0.2%. This will equal its September result. A higher number will be good for the currency because this report is a leading indicator of consumer inflation. When corporations pay more for services, the higher costs are usually passed on to the consumer.

The U.S. session is filled with minor reports including the Goods Trade Balance, Preliminary Wholesale Inventories, Flash Services PMI and New Home Sales. Hawkish investors want to see continued strength in the economy.

Traders may react to tonight’s Australian CPI data. A strong number could drive up demand for higher yielding currencies which would have a bearish influence on the lower-yielding Japanese Yen. A weak number could fuel a break in higher-risk assets, which would be supportive for the Japanese Yen.

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