USD/JPY Fundamental Daily Forecast – Flat as Investors Begin to Price in Fed, BOJ Rate Cuts

The Dollar/Yen is trading flat early Tuesday as investors continue to assess the risks associated with Brexit, a short-term solution to U.S.-China trade issues, and the high probability of a Fed rate cut on October 30, followed by an October 31 rate cut by the Bank of Japan. The Forex pair has essentially traded sideways since October 15 when it spiked higher on stronger-than-expected U.S. bank earnings.

At 06:35 GMT, the USD/JPY is trading 108.604, up 0.002 or 0.00%.

Economic News

There were no economic releases out of Japan overnight, and the U.S. won’t report until the U.S. morning so any price action we are witnessing is being driven by geopolitical events.

As far as the U.S. economy is concerned, at 14:00 GMT, a report on Existing Home Sales is expected to show 5.45 million units were sold last month. This will be down slightly from 5.49 million the previous month. Additionally, the Richmond (FED) Manufacturing Index is expected to come in at -7, slightly better than the previously reported -9. Last month, the report from the Federal Reserve Bank of Richmond showed manufacturing activity across Mid-Atlantic States softened in September.

With the Fed set to meet on October 29-30, its members are on lockdown so we’re not going to hear their opinions this week. As of last Friday, traders have priced in a 93.5% chance of a Fed rate cut next week. However, the FOMC members are just as divided as they were last week.

BOJ’s Kuroda Calls for Mix of Steps to Boost Economic Growth

Bank of Japan Governor Haruhiko Kuroda said on Sunday a mix of monetary easing, flexible fiscal spending and structural reforms to raise the country’s long-term growth potential could be effective in stimulating the economy.

Kuroda said central banks of advanced nations still have sufficient tools to boost growth, countering the view that years of low-growth, low-inflation environment have left them with little ammunition to fight an economic downturn.

But he said fiscal spending and structural reforms to boost an economy’s potential growth will help enhance the effect of monetary easing.

“We are equipped with unconventional tool kits, so there is no need to be too pessimistic about the effectiveness of monetary policy,” Kuroda told a seminar on long-term policy challenges for central banks.

“In responding to significant downward pressure (on growth), a policy mix of monetary easing, flexible fiscal policy and steps to raise the natural rate of interest could be effective.”

Daily Forecast

The market is saying the Fed will cut rates, and the BOJ has signaled the chance of easing as early as this month. Those two events kind of neutralize each other. That likely means investors will focus on risk today. Demand for risky assets will underpin the USD/JPY. A “risk-off” scenario will pressure the Forex pair.