USD/JPY Fundamental Daily Forecast – Rangebound as Fed Takes Center Stage

The Dollar/Yen is edging lower on Tuesday after posting a strong rally the previous session. Nonetheless, the Forex pair remains inside its two week range as investors await clues from the Federal Reserve on the direction of U.S. interest rates.

Meanwhile, surprisingly strong inflation in Tokyo last week supported the case for a policy shift by the Bank of Japan (BOJ) sometime in March or April. The move is expected to mean a hawkish shift from the bank’s current ultra-dovish policy.

At 04:32 GMT, the USD/JPY is trading 130.330, down 0.117 or -0.09%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $71.43, down $0.33 or -0.46%.

Fed Set to Start Two-Day Policy Meeting

The Dollar/Yen rose on Monday, a day before the Federal Reserve was due to begin a two-day policy meeting.

The Fed is widely expected to hike interest rates by an additional 25 basis points this week, and investors will be watching for any new indications on how many more rate increases are likely.

Fed funds futures traders are pricing for the Fed’s benchmark rate to peak at 4.94% in June, up from 4.33% now, and then for the central bank to cut it to 4.53% by December. This contrasts with comments from Fed officials, who have said that they will need to keep rates in restrictive territory for a period of time in order to bring down inflation.

The disparity comes in part as traders speculate that a weakening economy, and possible recession, will cause the Fed to pivot to a more dovish policy.

Economic New:  Japan Retail Sales Beat Forecasts, Dec Factory Output Inches Lower

Retail Sales, a barometer of service-sector activity and consumer spending, rose more than expected In December, while Japanese factories cut output slightly in December, capping the worst quarter for manufacturers since the onset of the COVID-19 pandemic, hit by stalling global demand and rising costs. The weakness in factory activity is ill-timed as companies face calls to hike wages to sustain Japan’s post-pandemic recovery.

Japanese retail sales rose 3.8% in December from a year earlier, beating a median market forecast for a 3.0% gain and its tenth straight month of expansion.

In a separate report, industrial output fell 0.1% in December from the previous month, government data showed on Tuesday. The drop was less than the median market forecast for a 1.2% decrease and followed upwardly-revised 0.2% growth in November.

Short-Term Outlook

We’re looking for more sideways action on Tuesday as traders await Wednesday’s Federal Reserve 25- basis point rate hike.

Going into the Fed’s meeting, policymakers are in a difficult position because lingering inflation is going to force them to raise rates despite signs of weakness in other areas of the economy.

Furthermore, financial market traders expect to see a softer tone from the Fed because of fears of a recession, while Fed speakers have been pushing for the need to keep rates in restrictive territory for a prolonged period in order to drive down inflation.