USD/JPY Fundamental Daily Forecast – Could Weaken if Fiscal Stimulus Talks Gain Traction

The Dollar/Yen is trading slightly lower on Thursday as investors continue to weigh the hopes of the coronavirus vaccine on the possibility of fresh fiscal stimulus from the government.

A successful vaccination launch could help speed up the economic recovery in the United States, but not before the economy dips due to the lack of new stimulus. The week-long sideways price action suggests Dollar/Yen traders are betting on both sides of the equation with no real strong bias at this time.

At 10:32 GMT, the USD/JPY is trading 104.306, down 0.113 or -0.11%.

Technically, the main trend is up, but momentum is trending to the downside. This is helping to hold the Forex pair inside a trading range. The main range is 103.177 to 105.677. The USD/JPY has been straddling its retracement zone at 104.427 to 104.132 since the middle of November.

An upside bias could develop on a sustained move over 104.427, and a downside bias could develop on a sustained move under 104.132.

Risk Appetite Supports Dollar Over Yen

Risk appetite is being boosted by optimism about recent developments towards the roll-out of COVID-19 vaccines. This is driving the U.S. Dollar against the riskier currencies, but providing support versus the Japanese Yen.

New Stimulus Measures Favor Yen Over Dollar

“Additional fiscal stimulus ahead of the new President Joe Biden assuming office would lower the current downside risks for the economy and thus principally fuel inflation expectations, which will weaken the dollar in view of the Fed’s long-term expansionary monetary policy targets,” wrote Commerzbank FX strategist Esther Reichelt in a note to clients.

The two issues are offsetting each other, leading to the sideways trade.

Japan’s Service Sector Struggles to Recover Amid COVID-19 Resurgence:  PMI

In economic news, activity in Japan’s services sector continued to falter in November, a private sector survey showed, as a resurgence in coronavirus infections weighed on new business and employment conditions.

The final Jibun Bank Japan Services Purchasing Managers’ Index (PMI) was little changed from October’s reading, edging up a seasonally adjusted 47.8 from 47.7. Though the final result was better than a preliminary 46.7 reading, the headline index remained firmly in contraction territory below the 50 neutral level.

The world’s third-largest economy has been gradually recovering from a virus-induced slump earlier this year, but it is expected to take years before it will return to pre-pandemic levels, especially within the service sector, which contributes nearly 70% of its gross domestic product.

Daily Forecast

We expect more sideways price action with the USD/JPY continuing to straddle 104.427 to 104.132. We’re not likely to see much movement away from this area unless the fiscal stimulus bill starts to gain traction. In this case, the Dollar would likely weaken.