USD/JPY Fundamental Daily Forecast – Flat to Lower Despite Bullish News

The Dollar/Yen is trading lower on Thursday, but inside the previous session’s range. The price action suggests investor indecision and impending volatility. On Wednesday’s the Forex pair rallied after the release of the Fed minutes, however, there has been no follow-through to the upside. The price action is surprising because U.S. Treasury yields are firming and investor appetite for risk is continuing. Furthermore, economic data in Japan was week, which suggests the Bank of Japan may have to inject more stimulus into the economy.

At 05:00 GMT, the USD/JPY is trading 110.725, down 0.127 or -0.12%.

Fed Minutes

In its minutes, the Fed judged that a “patient” approach to interest rate hikes would be prudent as it continued to weigh various headwinds to growth. These headwinds included “the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions.”

The minutes also showed Fed policymakers spent a lot of time discussing market conditions, particularly on the emphasis that Fed actions were having on prices of risky assets like stocks and corporate bonds. That being said, the Fed also signaled they will soon lay out a plan to stop letting go of $4 trillion in bonds and other assets, but are still debating how long their newly adopted “patient” stance on U.S. rates will last.

Japan Economic Data

Japanese manufacturing activity contracted in February for the first time in two-and-a-half years as factories cut back output amid shrinking domestic and export orders, a private survey showed on Thursday. The survey also showed business confidence in Japan soured for the first time in more than six years, highlighting the growing toll that the U.S.-China trade war is inflicting on Asia’s export-reliant economies and global manufacturing, according to Reuters.

The Flash Markit/Nikkei Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 48.5 in February from a final 50.3 in January. This represented the first contraction since August 2016.

Additionally, industry activity in Japan dropped 0.4% in December compared to the previous month, according to a report by the country’s Ministry of Economy, Trade and Industry. The seasonally adjusted index of all industry activity stood at 105.8 in December, compared to 106.2 in November.

Daily Forecast

It’s hard to explain today’s weakness because the reports are bearish for Japan’s economy, which means the Bank of Japan is going to have to continue to be accommodative. This should be bullish for the USD/JPY. Furthermore, the Fed minutes were supportive for higher risk assets, which should’ve also made the Japanese Yen a less-desirable asset.

On Thursday, investors will get the opportunity to react to a slew of U.S. economic data including Durable Goods, the Philadelphia Fed Manufacturing Index, Weekly Unemployment Claims, Flash Manufacturing PMI, Flash Services PMI, the Conference Board’s Leading Index and Existing Home Sales.

These reports won’t have much an impact on the USD/JPY if bullish news about a U.S.-China trade deal comes out. According to a report from CNBC, “Negotiators are drawing up six memorandums of understanding on structural issues:  forced technology transfer and cyber theft, intellectual property rights, services, currency agriculture and non-tariff barriers to trade.”

This news will be supportive for U.S. equities, which should help to underpin the Dollar/Yen.