USD/JPY Fundamental Daily Forecast – Divergence in Monetary Policy Still Favors U.S. Dollar

Look for consolidation this week then a resumption of the rally because the divergence in monetary policy between the hawkish U.S. Federal Reserve and the dovish Bank of Japan will continue to make the U.S. Dollar a more attractive
James Hyerczyk
Japanese Yen
Japanese Yen

The Dollar/Yen is trading flat-to-higher early Tuesday after posting a volatile two-sided trading session on Monday. The Forex pair is trading inside yesterday’s range which suggests investor indecision and impending volatility.

At 0616 GMT, the USD/JPY is trading 111.369, up 0.012 or +0.01%. On Monday, the Dollar/Yen plunged for a third session to 110.750, its lowest level since July 9, before recapturing nearly all of its earlier loss at the close with the Forex pair settling at 111.357, down 0.105 or -0.09%.

The USD/JPY weakened early in the session following reports the central bank was debating moves to scale back its massive monetary stimulus. Also helping the yen were comments by U.S. President Donald Trump on Friday criticizing the greenback’s strength, which in turn hit the Japanese stock market, triggering a further unwinding of short yen positions.

According to Reuters, the Bank of Japan, facing stubbornly low inflation, is in unusually active discussions before this month’s policy decision, with changes to its interest-rate targets and stock-buying techniques on the table.

The BOJ’s current policy, adopted in mid-2016, consists mainly of negative short-term interest rates, keeping the 10-year yield around zero percent and buying about six trillion yen of stocks through exchange traded funds (ETFs).

The BOJ is scheduled to hold its next monetary policy meeting on July 30 and 31.

The USD/JPY mounted its strong comeback rally on Monday, helped by a steep rise in U.S. Treasury yields on expectations that the Federal Reserve would continue raising interest rates despite last week’s criticism from President Trump.


The USD/JPY is posting a limited range early Tuesday, pressured by exporters who bought the yen, and supported by firm Treasury yields.

The yen firmed against the dollar as Japanese exporters converted their foreign earnings into the local currency. Small exporting firms typically buy yen as the end of month approaches.

Rising Treasury yields and expectations the Federal Reserve would persist with its rate hikes this year are offsetting the losses from the exporter buys.

With the BOJ meeting on July 30 and July 31, Dollar/Yen traders may have to wait a week before making their next major move. This could lead to a volatile, two-sided trade.

BOJ officials have made it clear that their next move, although aggressive, will not be a tightening. The price action on Monday, however, indicated otherwise.

At the same time, bullish USD/JPY traders are going to have to put aside Trump’s criticism of Fed policy and the dollar’s strength before the Forex pair can once again assault the 113.000 area.

Look for consolidation this week then a resumption of the rally because the divergence in monetary policy between the hawkish U.S. Federal Reserve and the dovish Bank of Japan will continue to make the U.S. Dollar a more attractive investment.

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