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James Hyerczyk
USD/JPY
USD/JPY

After surging to its highest level since late 2017 on Monday, the Dollar/Yen is under pressure early Tuesday. Providing support for the Forex pair the last several days has been expectations of higher interest rates after the Fed raised its benchmark interest rate on September 26 and strongly suggested another rate hike for December.

At 0637 GMT, the USD/JPY is trading 113.779, down 0.202 or -0.18%.

On Monday, buyers took out the December 12, 2017 top at 113.745 and at the close, the Forex pair seemed to be in a position to continue the rally with the November 6, 2017 top at 114.728 the next major target. However, sellers have appeared early in the session suggesting the emergence of profit-takers.

Trade news helped drive the USD/JPY higher yesterday. Demand for higher-risk assets increased following the announcement of a new trade deal between the United States and Canada.

In the U.S., a report showed U.S. manufacturing activity slowed in September as growth in new orders moderated sharply, but factories hired more workers, pointing to sustained strength in the sector. The institute for Supply Management (ISM) said its index of national factory activity dropped 1.5 points to a reading of 59.8 last month from 61.3 in August, which was the highest since May 2004.

Additionally, the Commerce Department showed construction spending edged up 0.1 percent in August. Traders, however, were looking for a 0.4 percent increase. Data for July was revised up to show construction outlays rising 0.2 percent instead of the previously reported 0.1 percent gain.

Forecast

Demand for risky assets is likely to continue to drive the price action in the USD/JPY on Tuesday. Traders are also likely to react to the direction of U.S. Treasury yields. However, due to the recent prolonged rally in terms of price and time, the Forex pair may be due for a short-term correction due to overbought technical factors.

On the economic front, traders will get a chance to react to comments from FOMC Member Quarles. Additionally, Fed Chair Jerome Powell is also scheduled to speak at 1645 GMT. Powell could move the market if he discusses the impact of the trade disputes on the economy.

U.S. reports are limited to Total Vehicle Sales which are expected to come in at 16.8 million.

Traders should also start watching for developments in U.S.-Japan trade relations. Now that a new deal has been reached between the U.S., Canada and Mexico, Japan and the U.S. are likely to resume negotiations. U.S. President Trump and Japanese Prime Minister Shinzo Abe agreed on September 27 to start fresh talks.

Technically speaking, the direction of the USD/JPY on Tuesday is likely to be determined by trader reaction to 113.745. A trade under this level will signal that the selling is greater than the buying at current price levels. A weekly close over 114.000 could have long-term bullish ramifications.

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