USD/JPY Fundamental Daily Forecast – Falling Treasury Yields Making Dollar Less-Attractive Investment

The Dollar/Yen plunged on Wednesday after the U.S. Federal Reserve changed course from its December outlook and abandoned all plans to raise rates this year, nearly signaling the end to its three-year campaign to normalize policy.

U.S. Treasury yields spiked lower on the news, tightening the spread between U.S. Government bonds and Japanese Government bonds and making the U.S. Dollar a less-desirable asset. Treasury yields hit their lowest level since early 2018.

At 07:25 GMT, the USD/JPY is trading 110.471, down 0.232 or -0.21%. This is a continuation of yesterday’s steep 0.6 percent loss, the biggest one-day loss since the flash crash of early January.

Fed Recap

On Wednesday, the U.S. Federal Reserve left its benchmark interest rate unchanged and projected no rate hikes in 2019. The benchmark rate now stands in a range of 2.25 percent to 2.5 percent. It also said it will stop shrinking its bond portfolio in September, a move that should help hold down long-term interest rates.

In signaling it would refrain from raising rates, central bank policymakers reduced their forecasts from two that were previously predicted in December. They now project one rate hike in 2020 and none in 2021.

Fed policymakers are taking a break from further rate hikes partly in response to slowdowns in the US and global economies. However, it did note that while the job market remains strong, “growth of economic activity has slowed from its solid rate in the fourth quarter.” The Fed now sees economic growth of just 2.1 percent this year, down from its previous projection of 2.3 percent growth.

Daily Forecast

The daily chart indicates the trend is down and downside momentum continues to pressure prices. The major range this year is 108.495 to 112.137. Its 50% to 61.8% retracement zone at 110.316 to 109.886 is the primary downside target. We could see a technical bounce on the first test of this zone, but if it fails, prices could accelerate to the downside with 108.495 the next likely target.

The USD/JPY could see further downside pressure over the long-term if the slowing economy worsens and opens the door for a potential rate cut later this year if the economy slows as much as some analysts fear.

Financial market traders have become more convinced that the Federal Reserve will be more accommodative on interest rates.

“The fed funds futures market is assigning a 47.8 percent probability of at least one rate cut by January 29, 2020,” according to the CME’s FedWatch tool.

Futures contracts are also implying a 39 percent probability of a rate decrease by December 11, up from only 23 percent before the Fed’s policy decision at 18:00 GMT on Wednesday.

Fed Chair Jerome Powell seemed to be unfazed by the sudden change in policy. He said that despite the recent dip in economic growth that “economic fundamentals are still very strong,” adding that Fed officials “see a favorable outlook for this year.”

Powell went on to say that “We foresee some weakening, but we don’t see a recession.”