USD/JPY Fundamental Daily Forecast – Rapidly Rising as Investors Increase Bets on Full Point Fed Rate Hike

The Dollar/Yen is soaring to a new 24-year high as investors price in the increasing possibility of a 100-basis point rate hike by the Fed at its July 26-27 monetary policy meeting.

At the same time, the Bank of Japan remains committed to its ultra-dovish policy, which means no rate hikes are in the cards. So essentially, the widening interest rate differential is making the U.S. Dollar a more attractive investment.

At 07:14 GMT, the USD/JPY is trading 138.925, up 1.479 or 1.08%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.17, down $0.24 or -0.35%.

Catalysts Driving Dollar/Yen Higher

U.S. consumer price inflation rose sharply in June, hitting another 40-year high. The acceleration in prices after a pair of aggressive rate hikes by the Federal Reserve in May and June indicates policymakers may have to increase rates even greater than the 75-basis point rate hike expected at its July 26-27 monetary policy meeting.

With inflation momentum rising, red hot inflation increases the risk that policymakers will have to hike rates too aggressively, causing a recession.

According to the FedWatch data, traders have already ramped up wagers that the Fed could raise rates by 100 basis points at its July meeting. Currently, most of the bets are on a 75-basis point increase.

Fed’s Bostic:  ‘Everything in Play’ for July Rate Hike

Atlanta Federal Reserve Bank President Raphael Bostic on Wednesday stoked rising expectations for more aggressive Fed action ahead, saying higher than expected June inflation might require policymakers to consider a 100 basis point increase at their meeting later this month, Reuters reported.

“Everything is in play,” Bostic told reporters during a tour of Tampa and St. Petersburg, following release of the latest report, which showed consumer prices surged 9.1% last month, an acceleration from May in a surprise to forecasters.

While Bostic said he needed to better study the “nuts and bolts” of the report, he felt “today’s numbers suggest the trajectory is not moving in a positive way…How much I need to adapt is really the next question.”

Japan Government, Bank of Japan Concerned by Rapid Yen Falls

Japan’s government is concerned about the Yen’s recent sharp declines and will monitor the currency market with even more sense of urgency while working closely with the Bank of Japan, Chief Cabinet Secretary Hirokazu Matsuno said on Thursday.

“We are concerned by the Yen’s rapid declines seen in the foreign exchange market recently,” Japan’s top government spokesperson Matsuno said, reiterating comments from a number of top policymakers in recent months.

Short-Term Outlook

The overall bullish trend is likely to continue as long as the hawkish Fed is raising rates and the dovish Bank of Japan is sitting on its hands.

However, there could be headwinds along the way. The first would be a Japanese government/Bank of Japan intervention. This move would not likely cause damage to the longer-term trend, but could shift short-term upside momentum.

A second headwind would be a U.S. recession. If recession fears were to heat up, investors would likely move money into the traditional safe-haven – U.S. Treasury Bonds. The Japanese Yen would also attract some safe-haven buying. This would put pressure on the USD/JPY. The dollar would benefit from holders of more risky currencies like the Australian, New Zealand and Canadian Dollars.