USD/JPY Fundamental Daily Forecast – Rangebound Trade Possible as Traders Prepare for Next Week’s Fed Meeting

The Dollar/Yen is moving higher on Tuesday as traders attempt to recover more of last week’s loss. The Forex pair is up for a second session following Friday’s sell-off. The price action suggests traders are responding to remarks made by Federal Reserve Chairman Jerome Powell on Friday and by Treasury Secretary Janet Yellen on Sunday on inflation, tapering and interest rate hikes.

At 04:32 GMT, the USD/JPY is trading 113.940, up 0.220 or +0.19%.

Traders Downplaying Monday’s Treasury Yield Dip

The Dollar/Yen is edging higher early Tuesday despite a dip in U.S. Treasury yields at the start of the week. The price action the last several sessions suggests investor indecision over Fed policy, which is helping to produce a two-sided trade. Investors seem to have priced in the start of tapering in November, but are uncertain over the timing of the first rate hike by the central bank.

Traders Eyeing Inflation Rise

Rising inflation is also a factor being monitored by investors after Treasury Secretary Janet Yellen said in an interview with CNN on Sunday that she expected inflation levels to fall back to the more acceptable 2% level in the middle of the second half of 2022.

Yellen’s comments reiterated those of Atlanta Federal Reserve Bank President Raphael Bostic who said last Thursday that supply chain disruptions and labor market constraints, coupled with strong consumer demand, could keep inflation high into 2022.

Meanwhile Federal Reserve Chair Jerome Powell added to the confusion when he said on Friday the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet touch the interest rate dial.

Conclusion:  High inflation could be around for another nine months, the Fed will begin tapering in November and we may not see the first rate hike until next summer.

Daily Forecast

On Tuesday, traders will get the opportunity to react to the latest Consumer Confidence data from the Conference Board at 14:00 GMT. It is expected to dip to 108.40 from 109.30. A lower than expected number will raise doubts over an early Fed rate hike, which could put downward pressure on the Dollar/Yen.

Don’t be surprised if we see a rangebound move between 114.694 and 113.414 as traders prepare for the Federal Reserve’s November 2-3 monetary policy meeting. Traders will be looking for clues as to the pace of tapering and the timing of the first Fed rate hike.

The more aggressive the Fed is in tapering and raising rates, the higher the USD/JPY could rise.