USD/JPY Fundamental Daily Forecast – Rangebound as Hopes for Early Fed Tapering Fade

The Dollar/Yen is edging higher on Tuesday but remains inside last Thursday’s wide range, suggesting investor indecision and impending volatility.

On Monday, the Forex pair rallied early in the session on the back of increased demand for risky assets as the S&P 500 and NASDAQ Composite soared to record highs, however, a dip in U.S. Treasury yields late in the session tightened the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive asset.

At 07:10 GMT, the USD/JPY is trading 109.832, up 0.143 or +0.13%.

Doubts about the Course of US Monetary Policy Driving Price Action

Last week and early Monday, the USD/JPY was supported as investors firmed up bets the U.S. Federal Reserve will start scaling back pandemic-era stimulus policies ahead of Europe and Japan.

But that strength was short-lived after doubts over whether the economy will be strong enough to withstand the reduction of stimulus, given the surge in coronavirus cases throughout July and August, crept into the market throughout Monday’s session.

The doubts were actually planted on Friday when Dallas Federal Reserve President Robert Kaplan, a well-known hawk, said he might reconsider the need for an early start to tapering if the virus harms the economy.

“It’s unfolding rapidly,” Kaplan said on Fox Business Network’s “Mornings with Maria” program.

“So far, it’s not having a material effect” on consumer activity like dining out, he said, but “it is having an effect in delaying return to office, it’s affecting the ability to hire workers because of fear of infection,” and may be affecting production output, he said.

Kaplan Maintains His Economic for Now

Kaplan also said on Friday he was for now leaving his economic forecasts unchanged, at 6.5% GDP growth for this year, with unemployment falling to around 4.5% by the end of 2021, a view he’s had for many months now.

Inflation as measured by a key Fed gauge, the personal consumption expenditures index, will likely be around 3.8% at year’s end, but ease next year to about 2.5%, still above the Fed’s 2% target, he said.

Short-Term Outlook

If the economy plays out as he expects, Kaplan said, he’s still support announcing a reduction in the Fed’s $120 billion in monthly asset purchases next month, and begin actually doing so in October.

The caveat, he said, is the highly contagious Delta variant.

It’s “a good thing” there’s still a month to watch it before the Fed’s next policy-setting meeting, he said.

What this means, in my opinion, is that Federal Reserve Chairman Jerome Powell will refrain from making any major tapering announcements at Jackson Hole on Friday, and that policymakers will need to see the August Non-Farm Payrolls numbers and the August consumer inflation data before making their decisions about an early tapering.