USD/JPY Fundamental Daily Forecast – Heightened Volatility as Risk Appetite Drives Price Action

The Dollar/Yen is trading slightly better on Friday after testing its lowest level since February 4 the previous session. The Forex pair is trading inside yesterday’s range which suggests investor indecision and impending volatility. This is understandable since investor sentiment may be shifting from “risk-off” to “risk-on” due to changes in the geopolitical landscape over U.S.-China trade relations.

At 10:26 GMT, the USD/JPY is trading 109.836, up 0.073 or +0.06%.

Economic data and the divergence between the monetary policies of the less-dovish U.S. Federal Reserve and the ultra-dovish Bank of Japan took a backseat this week as global investors shifted their attention toward U.S.-China trade relations. Essentially, fear drove investors into the safe-haven Japanese Yen.

President Trump triggered the steep break in equity markets on Sunday when he announced he was scheduling new tariffs on Chinese imports on Friday. The move encouraged investors to seek shelter in safe-have assets like the Japanese Yen and Treasurys.

So the strength in the Japanese Yen this week had nothing to do with any expected shift in monetary policy. It had to do with having a place to park funds taken from the stock market, while U.S. and Chinese negotiators tried to rekindle the trade deal they had been working on for months after as President Trump put it China “broke the deal”. At the same time, Trump vowed not to back down on raising tariffs or imposing new ones unless Beijing “stops cheating our workers.”

Stocks turned around and risk-takers began moving back into stocks at the mid-session on Thursday after President Donald Trump told reporters that a “deal is still possible,” and that he had received a “beautiful letter” from Chinese President Xi Jinping. The USD/JPY hit its low for the week at that time, leading to today’s early strength.

Daily Forecast

The direction of the USD/JPY on Friday will be determined by investor demand for risk. If the developing “risk-on” scenario continues then look for the Dollar/Yen to firm and start recovering some of this week’s losses.

Stock index futures are trading higher shortly before the cash market opening as investors remain hopeful that the U.S. and China can reach a trade agreement despite the new tariffs that went into effect at midnight (04:00 GMT).

Additionally, traders are hopeful that the new tariffs are not applied to Chinese exports that are already in transit before the deadline, which provides some additional time for the two sides to reach an agreement.

Heightened volatility is expected to continue to drive the price action in the USD/JPY as U.S.-China officials continue to work out their differences. Further stock market weakness will put pressure on the Dollar/Yen, while short-covering and the return of buyers to the stock market will be supportive for the USD/JPY.