USD/JPY Fundamental Daily Forecast – Dovish Fed, Renewed Trade Deal Worries Drive Investors Away from Risk

The Dollar/Yen is trading sharply lower on Thursday as the U.S. Federal Reserve’s decision to cut interest rates and the Bank of Japan’s decision to hold rates steady, lead to a tightening of the spread between the U.S. Government bond and the Japanese Government bond, making the Japanese Yen a more attractive asset than the U.S. Dollar.

At 10:15 GMT, the USD/JPY is trading 108.300, down 0.545 or -0.50%.

Lower U.S. Treasury yields and demand for risky assets are also driving the Dollar/Yen lower. This move may have been fueled by a report from Bloomberg News, citing unnamed sources, that Chinese officials have been casting doubt over the possibility of a long-term trade deal with the U.S., despite the two sides closing in on an initial “phase one” accord, sending stock futures tumbling.

Bank of Japan

The Bank of Japan maintained is policy rates on Thursday but it signaled further monetary easing going forward. The central bank said short and long-term interest rates are expected to remain at their current or lower levels as long as it is necessary to achieve its price stability target.

The BOJ Policy Board voted 7-2 to maintain interest rates at -0.10 percent on current accounts that financial institutions maintain at the bank.

The BOJ also said it will purchase government bonds so that the yield of 10-year JGBs will remain at around zero percent.

The central bank also downgraded its inflation and real growth projections. The inflation outlook for fiscal 2020 was lowered to 1.1 percent from 1.3 percent and that for fiscal 2021 was reduced to 1.5 percent from 1.6 percent.

Real GDP was forecast to grow 0.7 percent in fiscal 2000, down from the previous projection of 0.9 percent. Likewise, the outlook for fiscal 2021 was trimmed to 1 percent from 1.1 percent.

U.S. Federal Reserve

On Wednesday, the Fed cut its benchmark interest rate 25 basis points as widely expected. It also indicated the possibility of a pause in easing monetary policy. In doing so, policymakers said they “see the current stance of monetary policy as likely to remain appropriate.”

After the release of the interest rate and monetary policy statements, Powell stressed that any future move to increase borrowing costs would have to be preceded by a meaningful and consistent uptick in inflation, the rate at which prices rise in the U.S. economy. That could mean a long wait until the next hike, with the Fed’s preferred inflation gauge showing little signs of breaking out anytime soon.

Daily Forecast

The momentum is to the downside on Thursday and may even accelerate over the near-term into 107.886 then 107.463. The divergence in policy was the primary driver of the weakness. Especially bearish for the U.S. Dollar were the dovish comments from Fed Chair Powell, saying the central bank would not raise rates until inflation increased.

Renewed concerns over a long-term trade deal between the U.S. and China is the event fueling the acceleration to the downside. This is making risky assets less-attractive.