USD/JPY Fundamental Daily Forecast – Concerns Over Italian Finances Driving Investors into Safe-Haven Japanese Yen

The Dollar/Yen closed lower on Tuesday as investors responded to a drop in U.S. Treasury yields and increasing financial problems in Italy. The Japanese Yen was essentially used as a safe-haven asset.

Cautious investors were reacting to a drop in the Euro which fell to a six-week low on Tuesday after a senior lawmaker in one of Italy’s ruling parties said most of the country’s problems would be resolved if it readopted a national currency.

Italy’s coalition proposed a budget with a higher-than-expected deficit target, exacerbating tensions with other Euro Zone leaders and worrying investors who want Rome to bring its debt under control.

The lawmaker, Claudio Borghi, later rowed back on the comments, while Prime Minister Giuseppe Conte said the Euro was “unrenounceable”.

Most of the single-currency’s losses came after Borghi, the economic head of the right-wing League party, said Italy would enjoy more favorable economic conditions outside the Euro Zone.

In economic news, U.S. Federal Reserve Chairman Jerome Powell sees the U.S. economy generating highly optimistic expectations, with the unusual combination of low unemployment and inflation fueling hopes for an extended expansion.

Early Tuesday in Japan, Consumer Confidence rose slightly to 43.4 from 43.0. There was no reaction from traders.

Forecast

Wednesday is a big day as far as U.S. economic data is concerned. The slew of data could move the USD/JPY, but it doesn’t have to especially if the news is overridden by escalating tensions between Italy and Euro Zone officials.

The U.S. session starts with a speech from FOMC Member Barkin and ends with a speech by Fed Chair Powell. Sandwiched in between are speeches by FOMC Member Brainard and FOMC Member Mester.

As far as economic data is concerned, the ADP Non-Farm Employment Change report will give investors an early peek at Friday’s U.S. Non-Farm Payrolls report. It is expected to show the private sector of the economy added 185K jobs in September.

Final Services PMI is expected to come in at 52.9. The major report is the ISM Non-Manufacturing PMI. It is forecast at 58.0, down slightly from 58.5.

Longer-term, the USD/JPY is bullish because of the divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan. However, short-term worries over Italy could pressure the Forex pair because of flight to safety buying into the Japanese Yen.