USD/JPY Fundamental Daily Forecast – Hawkish Fed Could Spike Dollar/Yen Higher

The Dollar/Yen is trading higher early Wednesday after surviving an earlier attempt to drive it through a key support area. The Forex pair is being supported by a somewhat hawkish outlook for the Federal Reserve’s monetary policy decisions to be released later in the day, an easing of concerns over an Evergrande default in China and a dovish outlook for the Japanese economy by the Bank of Japan.

At 07:10 GMT, the USD/JPY is trading 109.567, up 0.350 or +0.32%.

Key Technical Area Holding as Support

The main range is formed by the April 23 main bottom at 107.479 and the July 2 main top at 111.659. The USD/JPY is currently trading inside its 50% to 61.8% retracement zone at 109.569 to 109.076.

Earlier in the session buyers came in at 109.122 to stop a price slide. This area has been tested successfully four times since Mid-July.

Overtaking 109.569 will indicate the presence of buyers. A failure to hold 109.076 will indicate the selling pressure is getting stronger.

Federal Reserve Could Surprise Markets with Hawkish Shift

The Federal Reserve is expected to drop more hints on its future policy path, including when to start tapering its bond buying and when to start raising interest rates.

There are also rising expectations the central bank will signal its plans to start reducing its massive bond purchases in November if incoming data holds up.

The so-called “dot plot”, which charts policymakers economic and rates projections, will attract attention for clues on when the Fed will hike its interest rate hikes from the current near zero level.

Investors will interpret a change in the first expected rate hike from 2023 to 2022 as hawkish.

Easing Concerns over Contagion from an Evergrande Default Driving Risk Sentiment

Investors are seeing a shift in sentiment to “risk on” which is pressuring safe-haven demand for the Japanese Yen. Investors are drawing some relief in news embattled Chinese property developer Evergrande would make a coupon payment on its domestic bonds on September 23, calming fears of an imminent default.

BOJ Keeps Policy Steady, Offers Bleaker View on Exports, Output

The Bank of Japan (BOJ) kept monetary policy steady on Wednesday but offered a bleaker view on exports and output, reinforcing expectations the bank will maintain its massive stimulus even as major counterparts eye a withdrawal of crisis-mode support.

Daily Outlook

The price action will be dictated by the movement in U.S. Government bonds. If the Fed moves up the timeline for its first rate hike from 2023 to 2022 then Treasury yields could spike higher. This would widen the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive asset.

Gains in the USD/JPY could be capped, however, if risk sentiment turns negative due to renewed fears over an Evergrande default on its interest rate payment scheduled for Thursday.