USD/JPY Fundamental Daily Forecast – Prices Firm, but Investors Remain on Edge Over US-China Trade Dispute

The Dollar/Yen fell on Tuesday after U.S. President Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, prompting a swift warning from Beijing of retaliation. The news drove global stock markets sharply lower, sending investors scurrying for the safety of the Japanese Yen.

A drop in U.S. Treasury yields also helped boost demand for the Yen as it tightened the spread between U.S. Government Bond yields and Japanese Government Bond yields. This move is not expected to last, however, because of the divergence in monetary policy between the hawkish U.S. Federal Reserve and dovish Bank of Japan.

In U.S. economic news, reports on the U.S. housing industry came out mixed on Tuesday with Building Permits underperforming and Housing Starts exceeding expectations.

Building permits fell by 4.6 percent to a rate of 1.301 million units, the lowest since September 2017. Economists had forecast housing starts declining to a rate of 1.350 million units.

Housing starts rose 5.0 percent to a seasonally adjusted annual rate of 1.350 million units last month, the Commerce Department said on Tuesday. That was the highest level since July 2007. Data for April was revised slightly to show starts falling to a rate of 1.286 million units instead of the previously reported pace of 1.287 million units.

Forecast

An easing of tensions over trade wars and a slight recovery in global equity markets is helping to boost the Dollar/Yen early Wednesday. At 0414 GMT, the USD/JPY is trading 110.110, up 0.48 or + 0.05%.

The threat of a trade conflict is expected to continue to be the theme of the day on Wednesday. Look for the USD/JPY to weaken if escalating tensions over a trade war trigger risk aversion and another steep break in global equity markets.

A recovery in U.S. equity markets and a firming of U.S. Treasury yields could help boost the Dollar/Yen.

The daily chart indicates the trend is still up, but momentum has shifted to the downside. Conditions could turn ugly if sellers take out 109.179. Given the current trading conditions, it’s going to be difficult for buyers to take out 110.905 and continue the uptrend over the short-term.

Earlier in the session, the Bank of Japan released the minutes from its April monetary policy meeting. The minutes showed a lone BOJ policymaker said additional easing was needed to accelerate inflation, but most members wanted to keep monetary policy unchanged.

The minutes also showed that no board member submitted a formal proposal for additional easing at the meeting in April, although one member advocated speeding up the economy by taking additional easing measures to boost inflation expectations.

Looking ahead, the BOJ may lower its forecasts for consumer price growth at its next meeting in July but is likely to keep monetary policy on hold.

Wednesday in the U.S. will be a big day for central bank speakers. Scheduled to deliver speeches at 1330 GMT are RBA Governor Lowe, BOJ Governor Kuroda and Fed Chair Jerome Powell. They could move the Forex markets if they discuss monetary policy. Since the Fed is hawkish and the BOJ is dovish, the USD/JPY could strengthen if Powell delivers a hawkish speech.

Other reports include the U.S. Current Account and Existing Home Sales.