USD/JPY Fundamental Daily Forecast – Bearish Sellers Gained Confidence from Dovish Fed Minutes

The Dollar/Yen is being pressured for a second day as investors continue to digest the minutes of the Fed’s December meeting which were released on Wednesday at 1900 GMT. The reaction in the market confirms the dovish tone of the minutes. Although the minutes reiterated last week’s dovish comments from Federal Reserve Chairman Jerome Powell, the reaction suggests that the minutes may be stronger confirmation that the Fed may take a pause in rate hikes in 2019.

At 0816 GMT, the USD/JPY is trading 107.850, down 0.025 or -0.23%.

Early Thursday, Dollar/Yen investors are also reacting to another drop in U.S. Treasury yields, which is making the U.S. Dollar a less-attractive investment. Furthermore, bearish traders are also responding to weaker demand for higher risk assets.

Fed Minutes

To recap the event that ignited the selling on Wednesday, the Federal Reserve’s latest meeting minutes showed central bank members believe that a “limited amount” of interest rate hikes will be needed in the future.

Fed policymakers also conceded that the central bank’s policy path is “less clear” after hiking rates for a fourth and final time in 2018. Some members were hesitant about the December rate hike because of muted inflationary pressures.

Minutes Reiterate Powell’s Dovish Comments

Last Friday, Federal Reserve Chairman Jerome Powell appeased investor concerns when he said that the Fed will remain data dependent when considering adjustments to the reduction of its enormous balance sheet and additional increases to its benchmark interest rate.

The minutes confirmed Powell’s dovish stance. This helped give short-sellers the confidence to continue their pressure on the USD/JPY.

Forecast

The Fed minutes were dovish and investors are responding accordingly by selling the USD/JPY. The primary focus for investors is U.S. Treasury yields, which are dropping early Thursday. The Japanese Yen will become a more desirable investment if the spread between U.S. Government bond yields and Japanese Government bond yields continue to tighten.

Furthermore, the Fed mentioning less clarity on the timing of rate hikes and their call for patience makes it clear to investors that the Fed may be setting up for a pause in rate hikes.

On tap later today is the U.S. Weekly Unemployment Claims report and a slew of Fed speakers including Powell. The jobless claims report is expected to show 226K workers filed for unemployment last week, down from 231K.

Later in the day, traders will get a chance to respond to comments from FOMC Members Bullard, Evans and Clarida. Traders will be looking for dissenters from Fed policy, or somebody that feels the central bank should continue on its tightening path. Fed Chair Powell speaks at 1745 GMT.

I don’t expect Powell to become “more dovish” than he already is so if there is a shakeup in the market today, it will be because he says something unexpectedly hawkish.