USD/JPY Fundamental Daily Forecast – Fed Policy Shift, Abe Surprise Resignation Equals Volatility

The Dollar/Yen is trading flat shortly after the opening on Monday. The market is holding the previous day’s low following a wicked trading session on Friday that saw the Forex pair plunging 1.15%. The extreme volatility was fueled by the announcement of a major Federal Reserve policy decision and the announcement of the resignation of Japanese Prime Minister Shinzo Abe.

At 23:52 GMT, the USD/JPY is trading 105.491, up 0.142 or +0.14%.

On Friday, the Japanese Yen significantly strengthened against the dollar after the news that Abe, Japan’s longest serving prime minister, would step down due to worsening health.

Concerns about a possible shift away from Abe’s expansionary economic policy, known as Abenomics, drove the move in the safe-haven currency, investors said.

The strength in the Japanese Yen may have been attributed to a little uncertainty since Abenomics has been one of the more influential economic strategies, but the dollar also resumed its slide against a basket of major currencies in the wake of Fed Chair Jerome Powell’s remarks at the virtual Jackson Hole Conference.

Powell said the U.S. central bank would seek to keep inflation at 2%, on average, so that periods of two-low inflation would likely be followed by an effort to lift inflation above 2% for some time.

In practice, market participants expect this means the current ultra-low rates will stay lower for longer, thereby pressuring the dollar.

Short-Term Outlook

Early Friday, Japan’s longest-serving prime minister confirmed his intention to step down due to worsening health. Now, despite Abe’s planned departure, analysts expect a continuation of the country’s reflationary policies.

The Abenomics policy of massive fiscal, monetary support and economic reforms “may not have achieved all of its aims, but it wasn’t an unmitigated failure either, and Japan has made some important progress under his leadership,” one Asia analysts said.

Meanwhile, also on Friday, Federal Reserve officials diverged about what the new strategy might mean in practice and said there was no exact science on how it might be applied.

With short-term U.S. Treasury yields falling, and long-term yields rising, we’re likely to see some volatile price action in the USD/JPY over the near-term as investors adjust their portfolios to reflect a potential steepening of the yield curve.