USD/JPY Fundamental Daily Forecast – Lower after Powell Stops Short of Signaling Timing for Any Policy Shift

The Dollar/Yen finished lower on Friday after reversing earlier strength after Federal Reserve Chair Jerome Powell delivered a mixed message about the timing of the central bank’s tapering plans, disappointing bullish dollar traders.

Powell, in his highly anticipated speech, said the Fed could start tapering its massive support to the economy by year’s end, which was not as fast as many in the market had assumed.

On Friday, the USD/JPY settled at 109.855, down 0.228 or -0.21%.

Reuters reported that Powell said there had been clear progress toward maximum employment and he believed that if the U.S. economy improved as anticipated, “it could be appropriate to start reducing the pace of asset purchases this year.”

But Powell told the Fed’s annual Jackson Hole symposium the timing and pace of tapering should not be construed as a signal for when interest rates will begin to rise. The speech showed Powell has not adopted the hawkish stance of some Fed officials.

After minutes of the Fed’s policy-setting meeting in July were released on August 18, the dollar advanced because most market participants anticipated tapering to begin this year.

Dollar/Yen investors continued their upside bias throughout the week after hawkish Federal Reserve officials urged the central bank to begin paring bond purchases they fell have become ineffective, if not downright harmful.

“We probably don’t need the asset purchases at this point,” St. Louis Federal Reserve President James Bullard said on CNBC on Thursday, repeating his call for the Fed to start trimming its $120 billion in monthly bond purchases soon and end the program by early next year.

Bullard, along with Kansas City Fed President Robert Kaplan, also all downplayed the impact of the Delta variant in separate interviews, with George and Kaplan saying their business contacts were telling them the economic effects remained limited.

Short-Term Outlook

The USD/JPY could continue to drift lower over the short-term with investors mirroring the patience suggested by Powell as the Fed tries to nurse the economy back to full employment.

This assessment could change quickly, however, with the release of the U.S. Non-Farm Payrolls report on Friday.

Blowout employment data could encourage Fed policymakers to take a serious look at an early start to tapering at its September 21-22 meeting. With this news, speculators could start to drive the USD/JPY higher.