USD/JPY Fundamental Daily Forecast – Boosted by Fed Tapering, Rate Hike Expectations

Fed Decisions Move to the Forefront

The U.S. Federal Reserve holds a two-day meeting on November 2-3. It is widely expected to begin to pare back its massive stimulus, but traders will be looking for clues as to the timing of its first rate hike and the frequency of other rate hikes.

Steady-to-Better Treasury Yields

The 10-year U.S. Treasury yield rose slightly in a volatile session on Friday as the bond market remained unsettled ahead of this week’s Fed meeting.

The bond market has been volatile over the past week as corporate earnings and economic readings have given conflicting signals to investors and global central banks have begun to chart their separate paths to tighter policy. The 20-year yield is now higher than the 30-year yield, an unusual occurrence in the bond market, and short-term yields have spiked in recent days.

The volatility comes as U.S. policy makers are expected to make significant announcements next week as the federal government looks towards the next phase of the economic recovery.

Mixed U.S. Economic Data May have Capped Gains

On Thursday, the 10-year rate rose despite disappointing third-quarter economic growth data. The Commerce Department reported that U.S. gross domestic product had risen 2% in the third quarter versus the previous year, below the 2.8% forecast by economists.

On Friday, personal income fell 1% in September, more than the 0.4% decline expected by economists, according to Dow Jones. Consumer spending rose 0.6%, matching expectations. The core consumer price index rose 0.2% month over month, as expected, but the year-over-year change was the highest in three decades.

The University of Michigan’s final October consumer sentiment reading came in slightly better than expected at 71.7 but is well below levels from earlier in the year.

Short-Term Outlook

During the early part of this week, the focus will be on the Fed. The central bank is widely expected to announce that it will begin to unwind its $120 billion in monthly bond purchases and end the program by the middle of next year.

Investors will also be looking for the Fed’s comments on rising prices as inflation has been running at a 30-year high.

Later in the week on Friday the focus shifts to October’s employment report, which could show some improvement in hiring, as new cases of COVID-19 continue to decline.