USD/JPY Fundamental Daily Forecast – BOJ Hold Policy Steady, but Makes Framework More Flexible

The Dollar/Yen is trading higher early Tuesday after the Bank of Japan kept its policy steady as widely expected. The major news coming out of the central bank’s decision is that it would make its policy framework more flexible for the long-term yield target.

At 0653 GMT, the USD/JPY is trading 111.252, up 0.185 or 0.16%.

The details of the BOJ decision show that the central bank maintained its target for the 10-year government bond yield at around zero percent and the short-term interest rate target at minus 0.1 percent, however.

In its monetary policy statement, it explained that the yields may move up or down “to some extent mainly depending on developments in economic activity and prices.”

The BOJ also acknowledged that it will take “more time than expected” to achieve its inflation target of 2 percent.

In other news, the unemployment rate rose to 2.4%, versus a 2.3% estimate and 2.2% previous read. Preliminary Industrial Production fell by 2.1%, worse than the -0.3% forecast and -0.2% previous read.

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Forecast

Based on the market’s reaction after the release of the BOJ news, it looks as if investor’s read the announcement as dovish. Soon after the announcement, the yield on U.S. 10-year Treasurys fell almost 3 basis points to 2.950 percent. This widened the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a move attractive investment.

Economists interpreted the BOJ’s action to be a mild policy change, but its policy vector is heading towards tightening. Essentially, the central bank said it will let long-term yields go higher.

Tuesday could be a big day for the U.S. Dollar so investors will have to watch for heightened levels of volatility. Key reports that could influence the Fed and move Treasury yields and the U.S. Dollar are the Core PCE Price Index, Personal Spending, Personal Income and the Conference Board’s Consumer Confidence report.

Core PCE, the Fed’s favorite measure of inflation, is expected to come in at 0.1%. Personal Spending is expected to show a gain of 0.4%. Personal Income is expected to show a similar gain.

Consumer Confidence is expected to come in only slightly better at 126.5. This report is likely to reflect investor concerns over the trade disputes.

The key level to watch on the daily chart is 110.868. This price is a major technical pivot. Holding above this level will signal the presence of buyers. If the move can create enough upside momentum then we could see a rally into 111.899 to 112.208.

The main trend will change to down on a move through 110.588