USD/JPY Fundamental Daily Forecast – Dollar/Yen Reverses on Profit-taking Ahead of U.S. Labor Report

The USD/JPY hit its highest level since October 9 on Wednesday before turning lower for the session on profit-taking following a strong three day rally. The rally was fueled by increased demand for higher risk assets and solid U.S. economic data. The selling was likely related to profit-taking and position squaring ahead of Friday’s U.S. Non-Farm Payrolls report.

Earlier in the session, the Bank of Japan released its interest rate decision and monetary policy decision. In addition, the BOJ also released its Outlook Report. Traders also had the opportunity to react to minor reports on housing starts and consumer confidence.

U.S. equity markets rose sharply on Wednesday for a second straight day, fueled by strong earnings from General Electric and Facebook. Although the indexes are set to finish the month sharply lower, the Dow was able to add more than 300 points during the session, bringing its two-day gain to more than 700 points. The benchmark S&P 500 Index jumped over 1.2 percent as communication services outperformed. The tech-driven NASDAQ Composite surged nearly 2.0 percent and clawed its way out of correction territory.

The increased demand for risk dampened the Japanese Yen’s appeal as a safe-haven asset.

In other news, the ADP Non-Farm Employment Change report showed private payrolls rose by 227,000 in October. This was better than the expected growth of 189.000 after September’s 218,000, was knocked lower from 230,000.

Additionally, the U.S. Labor Department, said the employment cost index rose 0.8 percent for the third quarter, beating the estimate of 0.7 percent from economists surveyed by Refinitiv.

Both reports helped drive U.S. Treasury yields higher while solidifying the chances of a Fed rate hike in December. This helped make the U.S. Dollar a more attractive investment.

Early Wednesday, the Bank of Japan left interest rates unchanged as expected. Additionally, Japan’s central bank chief ruled out a near-term interest rate hike amid risks from global trade disputes, but also raised a firm warning about vulnerabilities in the financial system from years of loose monetary policy. The BOJ also cut its inflation forecasts.

The BOJ kept its short-term rate target at minus 0.1 percent and the long-term yield target around zero percent. BOJ Governor Kuroda also said the central bank has “absolutely no plan to change our zero percent target for 10-year government bond yields.”

Finally, the central bank also cut its inflation forecasts and projected core consumer inflation to hit 1.5 percent in the year-ending in March 2021 – well short of its 2 percent target.