USD/JPY Fundamental Forecast week of July 18, 2016

The USD/JPY reversed some of its declined late on Friday as risk returned to the markets after a coup attempt in Turkey and a massive terrorist attack in France. The pair ended the week at 104.89 with a gain of 4.32% after touching the 106 range just a day before. The dollar rose to a three-week high against the yen on Friday and was set for its biggest weekly gain against the Japanese currency in 17 years after strong U.S. and Chinese economic data diminished the appetite for the yen as a haven from risk.

The dollar rose to 106.30 yen, its strongest level since June 24, in Asian trade. It had retreated from those gains before a strong report on U.S. retail sales sent it back toward session highs. The dollar was last up 0.5 percent to 105.87 yen.

U.S. retail sales rose 0.6 percent in June, strongly outpacing the 0.1 percent rise expected by economists. It was the third straight monthly increase and lifted sales 2.7 percent from a year ago.

Dean Pepperell, chief currency strategist at Oanda in Toronto said the data was a positive indication for consumer demand. “That’s leading the market to consider re-pricing potential (interest rate) hikes again.”

Fed funds futures showed investors see an increased likelihood that the U.S. Federal Reserve will raise the nation’s overnight interest rates this year. Chances for a rate increase by December rose to 46 percent on Friday, according to CME Group’s FedWatch tool. Traders had priced in less than a 20-percent chance as recently as late June.

For the week, the dollar has rallied 5.3 percent against the yen, putting it on track for its largest weekly rise since February 1999, as expectations of significant stimulus from Japan weighed on the yen.

Speculation has grown since former Federal Reserve Chairman Ben Bernanke visited the Bank of Japan earlier this week. The visit fueled talk BOJ Governor Haruhiko Kuroda might provide “helicopter money,” which would involve the central bank directly financing government spending.

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