USD/JPY Fundamental Daily Forecast – Dollar Supported by Risk Aversion, Hawkish Outlook for U.S. Rate Hikes

Weaker global equity markets and lingering concerns over trade relations between the United States and its major trading partners – China, Canada, Mexico and the European Union – continue to drive investors into the safe haven U.S. Dollar.

At 0643 GMT, the USD/JPY is trading 111.030, up 0.152 or +0.14%.

Additionally, expectations for further rate hikes by the U.S. Federal Reserve because of the strengthening U.S. economy are also helping to drive the Dollar/Yen to its highest level since May 22. If upside momentum continues, it could challenge its May 21 top at 111.396. This top is a potential trigger point for an acceleration to the upside.

The USD/JPY appears to be supported by the best of both worlds. Firstly, risk is off, generated by trade concerns. This is helping to push the U.S. Dollar higher because of weakening emerging markets and commodity currencies. The choice destination for cash during risk aversion is the U.S. Dollar because of its high liquidity.

Secondly, strong U.S. economic data is helping to keep the U.S. Federal Reserve on-track to raise interest rates at least two more times in 2018. At the same time, the Bank of Japan is being forced to continue its dovish monetary policy because it can’t seem to drive inflation higher. This divergence in policy is helping to make the U.S. Dollar a more attractive investment.

In economic news, Tuesday’s data was supportive for the Fed’s quest to raise rates. Final Manufacturing PMI came in at 55.4, higher than the 54.6 estimate. ISM Manufacturing Prices were 76.8, higher than the 74.3 forecast. Construction Spending was up 0.4%, below the 0.5% estimate, however, the previous report was revised lower to 0.9%.

The Dollar/Yen received its biggest boost on Monday after the latest ISM Manufacturing PMI survey suggested the U.S. widened its lead over the rest-of-the-world economy during June.

The ISM Manufacturing Index rose to 60.2 for the month of June, up from 58.7 previously, when economists had looked for it to ease back to 58.2.

Forecast

Barring profit-taking or an unexpected end to the escalating trade war, the USD/JPY is likely to continue to be supported on Tuesday. The slow and steady climb suggests the buying has been orderly, which begs the question if volatility is getting ready to rear its sometimes ugly head. In this case for the bulls, we may be setting up for a spike to the upside.

The price action also seems to be indicating that U.S. investors are not too concerned about trade wars at this time because the ISM Manufacturing Index’s performance in June indicates the strength in the domestic economy is more than offsetting any increased uncertainty on trade policy.

In the U.S. on Wednesday, investors will get the opportunity to react to the latest data on Factory Orders (0.1% versus -0.8%). This may reveal concerns, if any, over trade wars. IBD/TIPP Economic Optimism (54.2 versus 53.9) and Total Vehicle Sales (17.0M versus 17.9M).

All of these reports could reveal some insight on how industry and consumers feel about the impact of the tariffs.