USD/JPY Fundamental Daily Forecast – Investors Want Clarity and Conviction from Federal Reserve

The Dollar/Yen fell for a third straight session on Friday as investors continued to adjust positions following a 12 session rally that drove the Forex pair to its highest level since November 2017.

The rally was driven by a sharp rise in U.S. Treasury yields as investors priced in the start of U.S. tapering in November and expectations for the first Fed rate hike as early as July 2022.

On Friday, the USD/JPY settled at 113.495, down 0.522 or -0.46%.

With Fed tightening and the Bank of Japan still extremely loose, the advantage is to the dollar, but the price action suggests the rally may have been a little too much, too fast. This is encouraging profit-taking and position-squaring. Prices are likely to fall until the Dollar/Yen hits a value area. The first potential target is 112.760.

Uncertain Fed Policy Making Dollar Bulls Nervous

The overall market is worried that inflation will get out of control if the Federal Reserve continues to waver on when it will make its first rate hike. The action in the 10-Year U.S. Treasury note futures market suggests traders are expecting to see a rate hike in July 2022, but comments from Fed officials on Friday may have fanned the flames of uncertainty.

Comments from key Fed speakers may have helped fuel the selling on Friday when they made mixed remarks on the timing of the first Fed rate hike.

Fed’s Bostic Sees End of 2022 Rate Hike

Atlanta U.S. Federal Reserve President Raphael Bostic said he expects high inflation to persist into 2022 and the central bank should raise interest rates by the end of the year.

“It’s becoming clearer and clearer that this is going to last into 2022,” Bostic said of rising inflation pressures. “Part of the ultimate answer to how long this will take will be how quickly we resolve some of the coronavirus issues as well as some of the supply chain challenges that are happening at a global level.”

“Demand remains very strong,” he added, so if the supply and labor constraints can get resolved, “I think there’s a lot of space for the economy to grow.”

“I was thinking late third, maybe early 4^th quarter for 2022,” Bostic said in a CNBC interview, when asked when he had penciled in an interest rate hike. By then, he said, the U.S. economy will be back to full employment.

Fed Chair Powell:  Time for Fed to Taper Bond Purchases but Not to Raise Rates

Federal Reserve Chair Jerome Powell on Friday said the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet touch the interest rate dial, Reuters wrote.

“I do think it’s time to taper; I don’t think it’s time to raise rates,” Powell said in a virtual appearance before a conference, noting that there are still five million fewer U.S. jobs now than there were before the coronavirus pandemic. He also reiterated his view that high inflation will likely abate next year as pressures from the pandemic fade.

“We think we can be patient and allow the labor market to heal,” he said.

Short-Term Outlook

All USD/JPY investors want is clarity and conviction from the Fed. Bostic and Powell’s comments on Friday didn’t help.