USD/JPY Forex Forecast -Traders Eyeing Factory Orders Data for Impact on Fed Rate Hike Decision

The Dollar/Yen is edging higher on Monday as traders brace for Tuesday and Wednesday’s congressional testimony from Federal Reserve Chairman Jerome Powell.

Ahead of Powell, investors are now pricing in at least three more 25 basis point rate hikes this year, with rates peaking at 5.43% by September. Meanwhile, the Bank of Japan is expected to hold its ultra-dovish policy steady, so the interest rate differential between the U.S. government and Japanese Government bonds will continue to favor the U.S. Dollar.

The critical issue of the Fed’s March policy meeting is whether policymakers agree to raise rates by 50 basis points to combat inflation. Traders are hoping Powell provides some clarity on the matter later this week.

At 10:22 GMT, the USD/JPY is 135.952, up 0.130 or +0.10%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.61, up $0.44 or +0.65%.

Heightened Volatility is the Theme

Traders are coming off a damaging week for the USD/JPY, which lost 0.49%. The loss came even as the benchmark U.S. 10-year Treasury note yield rose above the psychological 4% level at various points last week. An upward movement in the 10-year yield widens the spread between U.S. and Japanese government bonds. This makes the U.S. Dollar a more attractive currency than the Japanese Yen.

All Eyes on Powell Testimony and US Non-Farm Payrolls Data

Investors will be keying on two important catalysts this week: Powell’s congressional testimony on Tuesday and Wednesday and Friday’s U.S. Non-Farm Payrolls report.

Investors hope Powell will guide investors on how the central bank thinks about inflation and how long it will continue its rate-hiking campaign.

Last week, a pair of Fed officials added to the uncertainty over whether the Fed will go with a big 50-basis point hike or a smaller 25-basis point rate hike.

Fed Governor Christopher Wallers delivered a hawkish message when he said solid economic data could see rates above the 5.1%-5.4% range. This was followed closely by a less-hawkish Atlanta Fed President Raphael Bostic, who said he favored a “slow and steady” increase moving forward and a pause by mid or late summer.

Short-Term Outlook

Investors expect the latest factory orders data set to release at 15:00 GMT on Monday could give insight into conditions in the manufacturing sector.

Economists polled by the Dow Jones anticipate a fall of 1.8% in January, a decline from the 1.8% gain in the prior reading.

A weaker-than-expected reading could be bearish for the USD/JPY since it will dampen the chances of a 50-basis point rate hike by the Fed on March 22.