USD/JPY Fundamental Daily Forecast – Flat Trade Ahead of Trump’s State of the Union Speech

Increased demand for risky assets has been driving prices higher since Friday’s robust U.S. Non-Farm Payrolls report and stronger-than-expected U.S. ISM Manufacturing PMI report. The news also drove up U.S. Treasury yields which made the U.S. Dollar a more attractive investment.
James Hyerczyk
USD/JPY

The Dollar/Yen is trading flat late in the trading session on Tuesday. The price action is being fueled by extremely low volume tied to the start of the Lunar New Year in Asia. Bank holidays in New Zealand and China are also contributing to the muted price action. Traders could also be reluctant to take a position ahead of U.S. President Trump’s State of the Union Address at 02:00 GMT.

At 18:32 GMT, the USD/JPY is trading 109.888, down 0.021 or -0.02%. The range is 110.042 to 109.783.

The Forex pair is currently trading inside a 50% to 61.8% retracement zone at 109.445 to 110.452. Trader reaction to this zone will determine the near-term direction of the USD/JPY.

Increased demand for risky assets has been driving prices higher since Friday’s robust U.S. Non-Farm Payrolls report and stronger-than-expected U.S. ISM Manufacturing PMI report. The news also drove up U.S. Treasury yields which made the U.S. Dollar a more attractive investment.

Treasury yields rose because the strong economic data reduced the chances of a Fed rate cut later this year. There is also evidence that Treasury investors may be pricing in as many as one rate hike in 2019. The price action also suggests that some investors believe the Fed may have gotten it wrong when they said the economy was too weak for a rate hike at this time.

Earlier today, Dallas Fed President Robert Kaplan said he wants greater clarity on the economy before the central bank moves further on rates, Yahoo reported.

In a post Tuesday, Kaplan said the Fed “should take no further action” on the benchmark interest rate until policymakers get more detail on uncertainty facing the U.S. economy and the financial system.

“I believe that we are at a critical juncture in terms of monetary policy,” said Kaplan, who is an alternate member of the Federal Open Market Committee. “It is my view that the Fed should be exhibiting patience.”

On Monday, the President of the Cleveland Federal Reserve Loretta Mester said that the U.S. central bank’s policy of raising interest rates may not be suitable long-term.

“If the economy performs along the lines that I’ve outlined as most likely, the Fed funds rate may need to move a bit higher than current levels”, said Mester.

“If some of the downside risks to the forecast manifest themselves, and the economy turns out to be weaker than expected and jeopardizes out dual mandate goals, I will need to adjust my outlook and policy views.”

Please let us know what you think in the comments below. 

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