USD/JPY Fundamental Daily Forecast – FOMC Members Will Set the Tone on Friday

The Dollar/Yen is flat-lining on Friday for the fifth straight session, indicating investor indecision and impending volatility. The U.S. Dollar is being underpinned by rising U.S. Treasury yields. The Japanese Yen is being supported by weaker-than-expected U.S. economic data and lower demand for risk.

At 0750 GMT, the USD/JPY is trading 110.730, up 0.021 or +0.02%.

Higher U.S. Treasury yields are under pinning the U.S. Dollar on the back of a surge in long-term Treasury yields to a one-week high on news of progress in U.S.-China trade talks. However, the greenback’s gains are being capped by soft U.S. economic data. On Thursday, an unexpected fall in core capital goods orders and weak existing home sales, affirmed expectations that the Federal Reserve will hold interest rates steady.

Earlier in the session, Japan’s National Core CPI came in at 0.8%. This matched the forecast, but came in slightly above the previously reported 0.7%. This number is well below the Bank of Japan’s 2-percent target, reinforcing market expectations the country is nowhere near an exit form ultra-loose monetary policy. The national CPI rose by 0.2%, which was lower than December’s CPI of 0.3%.

The news is bearish for the Japanese Yen because the low inflation figure makes it difficult for the Bank of Japan to raise interest rates. Furthermore, earlier in the week, Bank of Japan Governor Haruhiko Kuroda said the central bank was ready to ramp up stimulus if sharp Yen rises hurt the economy and derail the path toward achieving its 2-percent inflation target.

Kuroda repeated that possible easing tools the BOJ could deploy included cutting short- and long-term interest rates, expanding asset buying or accelerating the pace of money printing.

“Whatever we do, however, we need to carefully balance the benefits and the costs of the step such as the impact on financial intermediation and market functioning,” Kuroda said.

Daily Forecast

The focus will be on Federal Open Market Committee member remarks. Traders don’t expect members, Williams, Clarida, Bullard and Quarles to waiver too much from the Fed’s decision to remain “patient” when making interest rate decisions. Furthermore, we could also find out more information on what the Fed plans to do with its balance sheet. The market expects the Fed to stop reducing its balance sheet, which is viewed as de facto tightening. Halting the practice could weaken the dollar.

On Thursday, St. Louis Fed President James Bullard told CNBC he thinks interest rate hikes and the reduction of bond holdings is near an end. He also said he expects a timetable to be finalized in “the next couple of months.” He also added that interest rates now are “a little too high.”