USD/JPY Fundamental Daily Forecast – Gains Capped by Heightened Stock Market Volatility

The Dollar/Yen is trading flat early Wednesday as investors take a break after driving the Forex pair into its highest level since April 13 on the back of increased demand for riskier assets.

Traders could also be positioning themselves ahead of Wednesday’s release of the Federal Open Market Committee Minutes from their April meeting and the release of reports from Japan on Trade Balance and Flash Manufacturing PMI.

At 08:23 GMT, the USD/JPY is trading 107.708, down 0.005 or -0.01%.

The USD/JPY has been supported this week by increased demand for stocks following comments from Fed Chair Powell on Sunday that suggested the need for more fiscal and monetary stimulus. On Monday, a report that suggested Moderna Inc. had showed progress in a coronavirus vaccine triggered a sharp rise in U.S. equities.

However, the narrative about the Moderna results has changed after a report from medical news website STAT said early data from Moderna Inc.’s COVID-19 vaccine was insufficient.

That report had poured cold water on optimism sparked a day earlier by the company’s announcement on progress in vaccine development. An effective vaccine is seen as the key to normalize the economy to levels before the pandemic.

In economic news, Japanese Core Machinery Orders fell 0.4%. This was better than the -6.8% forecast, but well below the 2.3% previous read. Traders showed little reaction to this news since data from earlier in the week already showed the country was in recession.

Daily Forecast

Risk sentiment is expected to drive the price action on Wednesday although traders will get the opportunity to react the latest FOMC Meeting Minutes. However, they may be disappointed because the minutes are not expected to reveal anything that hasn’t already been priced into the market.

“The minutes are likely to strike a gloomy note, with many Fed officials publicly becoming more downbeat about the prospects for a speedy economic recovery. But with the situation developing so rapidly, much of the discussion will be badly out of date,” Capital Economics said in a note.

Keep an eye on the movement in the equity markets today due to the overnight volatility. Fueling the volatility is uncertainty around a possible coronavirus treatment and vaccine and how economies will fare as they prepare to reopen.