USD/JPY Fundamental Daily Forecast – Hawkish Fed Should Drive Dollar/Yen Higher

The Dollar/Yen is inching lower shortly before the U.S. opening after giving back earlier gains. General uncertainty ahead of a number of key events including the U.S. Federal Reserve interest rate and monetary policy announcements later today, the Brexit vote on Thursday and the looming U.S. tariffs on Chinese imports on Sunday are helping to hold prices in a range this week.

At 10:16 GMT, the USD/JPY is trading 108.695, down 0.048 or -0.04%.

Fed Expected to Leave Interest Rates Unchanged

After cutting rates at its last three policy meetings, Fed policymakers are expected to vote almost unanimously to leave interest rates unchanged when it makes its announcements at 19:00 GMT.

Federal Open Market Committee (FOMC) members’ updated projections for the U.S. economy and interest rates will be the main focus to assess whether they think the rate cuts so far are enough to keep the economy rolling for another year.

According to CNBC, “Federal Reserve Chairman Jerome Powell is also expected to vow to do whatever it takes to keep the short-term lending market stable as year-end approaches and banks move to spruce up their balance sheets and make them look safer for regulatory purposes.”

“The Fed could give a nod to an improved economy and lower unemployment, following Friday’s blowout November jobs report. “

The USD/JPY could rally if the Fed comes across as more hawkish than expected.

Sideways Price Action Indicates Uncertainty over Trade Deal and Tariffs

Investors aren’t sure how to play the December 15 deadline for new U.S. tariffs on Chinese imports, which may be why the Dollar/Yen has been mostly rangebound over the past week.

The latest news has The Wall Street Journal reporting Tuesday that the U.S. plans to delay slapping China with additional tariffs as both sides try to work out the agreement.

Although the current price action suggests the markets now assume or anticipate that some form of phase one deal will be signed, the negotiations appear to be going down to the wire.

The latest reports have U.S. negotiators asking Chinese officials to commit to some agricultural purchases upfront before moving forward with a deal, according to The Wall Street Journal. Meanwhile, China wants its agricultural purchases to be proportional with the amount of tariffs the U.S. rolls back.

White House Economic advisor Larry Kudlow, downplayed reports of a tariff delay on Tuesday, noting the Trump Administration could still move forward with new levies targeting Chinese goods.

U.S. Economic Data

At 13:30, the U.S. will release a report on monthly consumer inflation. CPI is expected to have risen 0.2%. Core CPI is estimated to have risen 0.2%. The data is not expected to sway the Fed members. The Fed wants annual inflation to rise to 2% or higher.

Policymakers are not likely to worry too much inflation until it gets near 2%. A sudden downturn will also catch their attention.

Daily Forecast

Unless there is major news about the trade deal or tariffs, the USD/JPY is likely to remain rangebound. Positive developments will drive up demand for risky assets that could put pressure on the safe-haven Japanese Yen.

A hawkish Fed should drive up Treasury yields, which could push the Dollar/Yen higher.