USD/JPY Fundamental Daily Forecast – Powell: Economy in ‘Good Place’, Dampening Rate Cut Expectations

The Dollar/Yen is trading lower on Monday as renewed concerns over U.S.-China trade relations encouraged investors to seek shelter in the safe-haven Japanese Yen.

Last week, the Forex pair was pressured by a series of weaker-than-expected U.S. economic report that dramatically increased the chances of a Fed rate cut at the end of October from 20% to 93.5%. Some of these losses were recovered on Friday when a solid U.S. Non-Farm Payrolls report dampened the chances of the Fed being aggressive with its rate cuts.

At 08:00 GMT, the USD/JPY is trading 106.828, down 0.084 or -0.08%.

Today’s price action suggests investors are nervous over the outcome of the renewed trade talks between the United States and China in Washington on October 10-11. Since early September, optimism over a trade deal has driven the USD/JPY higher. Additionally, investors also lowered the chances of a Fed rate cut to about 20% during that time period.

The outlook on interest rates changed last week when the release of a disastrous ISM manufacturing PMI report and weaker-than-expected ISM non-manufacturing PMI report, fanned the flames of a U.S. recession.

Friday’s solid U.S. jobs report calmed talk about a recession, but over the weekend demand for safe-haven assets jumped after Bloomberg reported Chinese officials are signaling they are increasingly reluctant to agree to a broad deal pursued by U.S. President Donald Trump.

People familiar with the matter told Bloomberg News that Vice Premier Liu He, who will lead negotiations for China, told dignitaries that his offer to the U.S. will not include commitments on reforming Chinese industrial policy or government subsidies. These are among the Trump administration’s main demands in the trade talks.

In other news, a report showed Japan’s Leading Indicators came in at 91.7%, below the 91.8% forecast and the 93.7% previous read.

In the U.S. on Monday, Fed Chair Jerome Powell is scheduled to deliver a speech at 17:00 GMT.

On Friday, Powell described the U.S. economy as being solid, noting the central bank must do what it can to keep it there.

“While not everyone fully shares economic opportunities and the economy faces some risks, overall it is – as I like to say – in a good place,” Powell said in prepared remarks delivered at a “Fed Listens” event in Washington. The event is part of a monetary policy communication review by the Fed. “Our job is to keep it there as long as possible.”

Powell further added, “While we believe our strategy and tools have been and remain effective, the U.S. economy, like other advanced economies around the world, is facing some longer-term challenges – from low growth, low inflation, and low interest rates,” Powell said, adding the Fed is “examining strategies” that will help it achieve its inflation goal of 2%.

Daily Forecast

The Bloomberg report is not a major event, in my opinion, since traders weren’t expecting much from the meeting between the two economic powerhouses.

Powell’s comments were more important, however, because it sounds like he is not in favor of an October rate cut.

There are no economic reports today so traders will be focused on Powell’s speech at 17:00 GMT. Another less-dovish speech will likely underpin the USD/JPY.

Trump could trigger a break in the Forex pair if he decides to make negative comments about China or the trade deal. However, I don’t expect to hear from him since he has been busy lately tweeting about the impeachment inquiry.