USD/JPY Fundamental Daily Forecast – Direction Comes Down to Dovish Fed Versus Safe-Haven Demand Due to Trade Concerns

Traders are going to have to decide which is more important, a dovish U.S. Federal Reserve or fear of a breakdown in U.S.-China trade talks. A dovish Fed would be bearish for the Dollar/Yen because lower interest rates would make the dollar a less-attractive investment. While trade talk concerns could encourage safe-haven demand for the dollar.
James Hyerczyk
USD/JPY

The Dollar/Yen is trading higher on Wednesday shortly before the U.S. opening and the U.S. Federal Reserve announcements later in the session at 14:00 GMT. The early strength comes as a surprise after three days of lower closes. Slightly higher U.S. Treasury yields and firm demand for risky assets may be supporting the Dollar/Yen today as well as position-squaring ahead of the Fed news.

At 09:27 GMT, the USD/JPY is trading 111.572, up 0.163 or +0.14%.

The dollar is also getting some support from safe-haven buying tied to renewed concerns over U.S.-China trade relations as well as from Japanese importers on a “gotobi” date – a multiple of five – on which accounts are traditionally settled.

Fed Decisions

The U.S. Federal Reserve is widely expected to keep rates and policy unchanged, with investors primary focused on the Fed’s rate projections for the next few years. Traders are saying the central bank is expected to reduce the chances of a rate hike later in the year. This is potentially bearish for the Dollar/Yen.

Trade Talk Concerns

Traders are reacting somewhat to renewed concerns over U.S-China trade relations. The reaction is being fueled by media reports of U.S. concerns that China is pushing back against American demands in trade talks.

On the optimistic side, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are headed back to China for another round of negotiations with Chinese Vice Premier Liu He, according to The Wall Street Journal, citing unnamed Trump administration officials.

Bank of Japan Meeting Minutes

The latest Bank of Japan Monetary Policy Meeting Minutes released early Wednesday showed BOJ policymakers disagreed on how quickly the central bank should ramp up monetary stimulus as heightening overseas risks threatened to derail the country’s fragile economic recovery.

Most members agreed it was appropriate to maintain the BOJ’s current stimulus program. One member said the central bank must stress its readiness to take “quick, flexible and bold” action including additional easing, the minutes showed.

The minutes also showed another member said acting too hastily during times of uncertainty could lead to financial imbalances and unnecessary swings in the economy.

Daily Forecast

Traders are going to have to decide which is more important, a dovish U.S. Federal Reserve or fear of a breakdown in U.S.-China trade talks. A dovish Fed would be bearish for the Dollar/Yen because lower interest rates would make the dollar a less-attractive investment. While trade talk concerns could encourage safe-haven demand for the dollar.

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