USD/JPY Fundamental Daily Forecast – Biggest Reaction to Come from Outcome of Trade Talks

The Dollar/Yen is trading lower on Wednesday in a limited trading range ahead of the start of the crucial trade talks between the U.S. and China, and the latest monetary policy decisions from the U.S. Federal Reserve. Both events could trigger a volatile reaction in the Forex pair if they have a pronounced impact on risk appetite since this has been the theme driving the price action lately.

At 07:21 GMT, the USD/JPY is trading 109.284, down 0.093 or -0.08%.

In other news, Japan’s retail sales rose more than forecast in December, which may ease some concern about the outlook for private consumption at a time of growing pressure on the economy.

Fed Decisions

The Fed is widely expected to leave its benchmark interest rate unchanged. Although the expected moves by the central bank are going to be perceived as dovish, Federal Reserve Chairman Jerome Powell is expected to tone down his comments to avoid fueling a volatile response by equity traders.

Investors are looking for the Fed to direct remarks toward the balance sheet, patience and data dependence.

U.S.-China Trade Talks

Investors will be watching out for developments from the high-level trade negotiations between the United States and China. Traders are saying that these 2-day meetings will have an impact on the markets given the recent volatility tied to the economic slowdown in China and its impact on the global economy.

Japanese Retail Sales

Data from the Ministry of Economy, Trade and Industry showed Wednesday that retail sales in December rose 1.3 percent from a year earlier. This was more than the median estimate for a 0.8 percent annual increase and followed a 1.4 percent gain in November.

The government said that December’s increase was driven by annual spending increases of 4.1 percent on clothes and 4.4 percent on appliances.

Forecast

The Fed and the trade negotiations could impact the USD/JPY if they trigger a volatile reaction in the U.S. equity markets. Basically, if the news is bullish for stocks then look for the USD/JPY to be underpinned. If the news is bearish for stocks then the Dollar/Yen could weaken due to increased demand for the safe-haven Yen.

Ahead of the events, investors are pricing in a dovish Fed. This has been driving the Dollar/Yen lower over the short-run. Trade talk speculation hasn’t had much of an impact since the lower-level talks ended weeks ago. Therefore, we have to conclude the outcome of the trade negotiations are likely to have the biggest impact on the stock market, demand for risk and consequently the USD/JPY.