USD/JPY Fundamental Weekly Forecast – Trade Talk Progress Likely to be Supportive

There is only one major economic report in the United States this week and none from Japan. This likely means investors will be more focused on U.S.-China trade relations. At the end of the week, things were looking more upbeat for at least a partial deal. This helped boost the USD/JPY on Friday.
James Hyerczyk

The Dollar/Yen finished lower last week after hitting its highest level since August 1. The market was driven sharply lower in reaction to decisions by the U.S. Federal Reserve and Bank of Japan. A combination of mixed U.S. economic data on Friday and positive remarks from China on the progress of the trade talks helped the Forex pair recover some of those earlier losses.

Last week, the USD/JPY settled at 108.191, down 0.483 or -0.44%.

U.S. Federal Reserve

On Wednesday, the Federal Open Market Committee voted to cut its benchmark interest rate 25-basis points. The move was anticipated for weeks. The Fed also removed a key phrase from its statement that said it will “act as appropriate” to sustain the current expansion. Investors read this to mean policymakers were ready to take a break from their current rate-cutting policy, which likely means it will pause in December.

Federal Reserve Chairman Jerome Powell said in a press conference following the decision that the central bank would need to see a “really significant” rise in inflation before the Fed thought about hiking. With inflation running about 1.4%, or below the Fed’s 2.0% target, it looks like it will be a long time before the central bank even considers a rate hike.

Bank of Japan

The Bank of Japan kept its monetary policy steady on Thursday but introduced new forward guidance to more clearly signal the future chance of a rate cut, underscoring its concern over simmering overseas risks.

As expected, the BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%, by a 7-2 vote.

But the BOJ introduced new forward guidance – or a pledge central banks make on future monetary policy – that more strongly commits to maintaining ultra-low interest rates.

“The BOJ expects short- and long-term interest rates to remain at present or lower levels as long as needed to pay close attention to the possibility that the momentum toward achieving its price target will be lost,” the central bank said in a statement.

US Economic Data

The Dollar/Yen recovered slightly on Friday as investor sentiment got a lift from much stronger-than-expected U.S. Jobs data. The U.S. economy added 128,000 jobs in October, the Labor Department said. Economists were looking for a gain of 75,000 jobs for the previous month. Job growth data for September and August was also revised substantially higher. Average hourly earnings rose and the unemployment rate inched higher as expected.

Other data released Friday included the Institute for Supply Management’s reading on October U.S. manufacturing. The ISM’s manufacturing PMI came in at 48.3, representing a bigger-than-expected contraction in the sector.

U.S. – China Trade Relations

China said Friday it reached a consensus in principle with the U.S. during trade talks this week. The U.S. Trade Representative’s office also said Robert Lighthizer and Treasury Secretary Steven Mnuchin made “progress in a variety of areas and are in the process of resolving outstanding issues.”

Weekly Forecast

There is only one major economic report in the United States this week and none from Japan. This likely means investors will be more focused on U.S.-China trade relations. At the end of the week, things were looking more upbeat for at least a partial deal. This helped boost the USD/JPY on Friday.

The Chinese Commerce Ministry on Friday said the world’s two largest economies had reached “consensus on principles” during a “serious and constructive” telephone call between their main trade negotiators.

U.S. President Donald Trump said over the weekend he hoped to sign an agreement with Chinese President Xi Jinping at a U.S. location, perhaps in the farming state of Iowa.

“China wants to make the deal very much,” Trump told reporters at the White House on Friday evening. “I don’t like to talk about deals until they happen, but we’re making a lot of progress.”

Positive news about a trade deal should be supportive for the USD/JPY this week.

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