USD/JPY Fundamental Forecast – September 23, 2016

After trading down to its lowest level since August 23, the Japanese Yen lost ground to the U.S. Dollar, mostly on profit-taking after Wednesday’s sharp sell-off. At the end of the session, the buying was strong enough to produce a potentially bullish chart pattern. This could trigger a follow-through move on Friday. The USD/JPY closed at 100.760, up 0.459 or +0.46%.

The USD/JPY was under pressure and trading near a 4-week low early Thursday as investors continued to press the Forex pair in the wake of Wednesday’s Bank of Japan and U.S. Federal Reserve monetary policy decisions.

The BOJ said on Wednesday that it would start targeting 10-year interest rates, committing to keep them around zero as part of a new policy framework aimed at boosting the economy by driving up inflation. However, the news disappointed investors who had hoped for a more aggressive strategy. This resulted in the Japanese Yen gaining strength throughout the session.

The Federal Open Market Committee (FOMC) decided on Wednesday to keep interest rates unchanged. However, Fed Chair Janet Yellen signaled in her press conference that a rate hike was likely by year’s end. She also reiterated that the case for a hike is stronger due to the economy picking up and employment staying firm. The price action by the U.S. Dollar against a basket of currencies suggested otherwise as the Greenback weakened almost immediately after Yellen make her comments.

Economic data on Thursday was mixed with weekly jobless claims falling by 8000 and to their lowest level since July. Additionally, existing home sales fell more than expected in August.

FORECAST

The upside momentum created by Thursday’s reversal to the upside is likely to lead to further strength early Friday. Based on this assessment and the fundamental data, we have to conclude that the price action by the USD/JPY is being driven by technical factors.

This assessment was further supported by Chief Cabinet Secretary Yoshihide Suga who said, “We’re concerned about recent extremely nervous moves in the currency market.”

Despite the reversal on the daily chart, the USD/JPY is on track for its worst week since the week-ending July 29.

Over the near-term we could see the Dollar strengthen against the Japanese Yen, nonetheless, the bias will still be to the downside because of the general unhappiness with the Bank of Japan’s decision to retool its monetary framework.