USD/JPY Fundamental Daily Forecast – Higher Prices Likely if Powell Strikes Hawkish Chord

The Dollar/Yen is edging lower early Tuesday as investors took profits following a strong two-day surge. Nonetheless, the greenback remained elevated as investors considered the prospects for interest rates to remain higher for longer in many developed economies.

Helping to support this idea was the Reserve Bank of Australia’s (RBA) decision on Tuesday to raise its benchmark 25 basis points, while saying additional rate hikes were coming.

At 07:31 GMT, the USD/JPY is trading 132.130, down 0.500 or -0.38%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.00, down $0.50 or -0.73%.

Hovering Near Three-Week High on Central Bank Repricing of Higher Rates

Despite today’s small setback, the USD/JPY remains within striking distance of a three-week high of 132.900 reached on Monday during the U.S. trading session.

The strong surge since Friday is being fueled by hawkish central banks and the repricing of interest rates after traders relaxed for a few days last week while pricing in a softer-tone from the Federal Reserve.

The repricing of higher rates began after strong U.S. jobs growth in January, with employment rising 517,000, more than double economists’ expectations. The unemployment rate hit 3.4%, the lowest in more than 53 years.

There is not much economic data this week ahead of next week’s U.S. consumer inflation report, which likely means uncertainty over interest rates is likely to be the dominant theme among investors.

Negative Reaction to Government Reaching Out to Amamiya about Becoming BOJ Governor

The Dollar/Yen is also being underpinned by reports that Japan’s government has sounded out Bank of Japan (BOJ) Deputy Governor Masoyoshi Amamiya to succeed incumbent Haruhiko Kuroda as central bank governor, the Nikkei newspaper reported on Monday, citing anonymous government and ruling party sources.

Prime Minister Fumio Kishida told reporters later on Monday he would continue to consider the best candidate for the job, suggesting that no final decision had been made.

Japan Confirms Record Interventions to Support Yen

In other news, Japan finally confirmed on Tuesday that it made record interventions in the foreign exchange market in October, selling the dollar worth 6.35 trillion yen ($48 billion) to support the yen currency, Ministry of Finance (MOF) data showed.

The quarterly data showed a steep drop in the yen to a 32-year low of 151.94 to the dollar on Oct. 21 triggered the intervention that day, followed by another on Oct. 24.

Short-Term Outlook

Investors will be closely watching a speech by Federal Reserve Chairman Jerome Powell at the Economic Club of Washington later on Tuesday at 17:00 GMT.

Last Wednesday after the Fed’s rate hike decision, Powell told traders that inflation may have turned a corner. This helped fuel the notion that the Fed could end its aggressive rate hike campaign in March. This drove the USD/JPY sharply lower.

However, the USD/JPY rebounded on Friday after stronger labor market data put both March and June rate hikes on the table.

We expected Powell to stay hawkish and talk about the need for more rate hikes. This could send the Dollar/Yen higher.