USD/JPY Fundamental Daily Forecast – Early Price Action Suggests Risk May Be Back On

The Dollar/Yen is trading higher on Tuesday after a strong rebound rally erased all of Monday’s earlier losses. Yesterday, the Forex pair opened sharply lower due to safe-haven buying related to the week-end attack on Saudi oil facilities, a massive spike in crude oil prices and fear of an escalation of tensions in the Middle East.

Even with some headlines suggesting the United States and Iran are teetering on the brink of war, the Dollar/Yen is trading lower. One would think if there was even a sliver of truth to those headlines, the Forex pair would be trading sharply lower. This is not the case, however, which suggests cooler heads will prevail as the two sides try to solve issues diplomatically.

At 06:16 GMT, the USD/JPY is trading 108.214, up 0.064 or +0.05%.

Focus Shifts Back to Fed

Although crude oil traders are likely to raise their risk premium, and risky asset investors will remain on their toes due to the simmering conditions in the Middle East, investors will begin to gradually shift their focus to the start of the two-day U.S. Federal Reserve monetary policy meeting which starts on Tuesday and ends on Wednesday at 18:00 GMT with the release of its interest rate and monetary policy decisions.

For weeks, the markets have been pricing in a 25-basis point rate cut by the Fed at this meeting and similar cut in December. However, the recent thawing of tensions between the United States and China, combined with surprisingly better U.S. inflation and retail sales data suggests policymakers may put a December rate cut on hold. Traders will be looking for clues in tomorrow’s monetary policy statement to see if the chances of a December rate cut have dropped.

According to CNBC, the chances of a rate cut are still very high, but traders have also raised the chances the Fed will do nothing at this meeting from 0 to 34 percent. Traders may have changed their tune in response to some changing economic trends as well as inflation pressures caused by a 14% jump in oil prices.

This is interesting, but I think the Fed knows it would rock the financial markets if it decided to refrain from cutting rates at this meeting.

Technically, the longer-term trend is down, but momentum is clearly trending higher. The next objective for bullish traders of the USD/JPY is 109.317. The first key support level is 107.463, followed by 106.890.

Daily Forecast

We’re looking for a steady-to-higher USD/JPY on Tuesday as long as there are no geopolitical flare-ups that would turn the Japanese Yen into a highly desirable safe-haven currency. The Dollar/Yen is likely to be primarily supported by firmer U.S. Treasury yields and increased demand for risky assets.