USD/JPY Fundamental Daily Forecast – Reaction to Minutes May Be Muted Ahead of Trade Talks

Today’s Fed minutes are a toss-up. Furthermore, the data is stale. Since the mid-September meeting, reports have shown the U.S. economy has weakened. So it really doesn’t matter what policymakers thought about the economy two weeks ago.
James Hyerczyk
USD/JPY

The Dollar/Yen is trading higher on Wednesday as investors continue to position themselves ahead of the release of the Fed minutes and the start of trade talks between the United States and China on Thursday. The early price action suggests an optimistic tone ahead of both events, which is driving the slight increase in demand for risky assets.

At 14:51 GMT, the USD/JPY is trading 107.370, up 0.284 or +0.28%.

Despite the early strength, volume is extremely low so the buying can’t be trusted. There is no way to tell if the move is being represented by real buyers, or short-covering. Furthermore, the news about U.S.-China trade relations is constantly changing. The bottom line is no one really knows the outcome of the trade talks.

Some news articles are saying relations are strained because the U.S. blacklisted additional Chinese technology companies. Some are saying China may retaliate with additional tariffs. Other articles are saying the odds of a trade deal have faded because the U.S. imposed visa restrictions on Chinese officials. This prompted an article that said China may cut short the meeting on Friday.

Analysts at J.P. Morgan said in a note they expect four possible scenarios could emerge from the trade negotiations.

First, an “ice-breaking meeting that will lead to a major deal” in the coming months; second, a “mini-deal” focusing on China’s purchase of U.S. products and some structural reforms while new tariffs get postponed indefinitely; third, a no-deal status quo where new tariffs come into play, but negotiations continue; and finally, a break-up scenario, where there’s no deal and no further dialogue between the U.S. and China.

J.P. Morgan analysts said they are expecting a no-deal status quo while “market investors also have high hopes for a mini-deal.”

Fed Minutes

The Fed will release the minutes of its mid-September policy meeting at 18:00 GMT. Policymakers reduced rates by a quarter percentage point and left the door open to more cuts. Officials cut the benchmark rate by 25 basis points, but they were divided over the decision.

Today’s minutes should provide new clues about the Fed’s thinking on where to set interest rates, and more detail on the internal debate, including whether more officials thought another cut might not be warranted at their October 29-30 meeting.

The minutes should also outline two important discussions revealing the Fed’s immediate response to the breakdown in money-marketing functioning that sent the central bank’s benchmark short-term rate rising above its target range. The minutes will show how officials evaluated that situation at the time.

Daily Forecast

Today’s Fed minutes are a toss-up. Furthermore, the data is stale. Since the mid-September meeting, reports have shown the U.S. economy has weakened. So it really doesn’t matter what policymakers thought about the economy two weeks ago.

Additionally, traders aren’t likely to show too much of a reaction ahead of the trade talks.

The daily chart suggests the direction of the USD/JPY over the near-term is likely to be determined by trader reaction to the major 61.8% retracement level at 107.463.

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