USD/JPY Fundamental Daily Forecast – Rising on Fed Rate Hike Expectations

The Dollar/Yen reached its highest level since May 22 early Wednesday ahead of a Federal Reserve Monetary Policy meeting that could offer clues on the number and pace of future U.S. rate hikes later this year.

At 0949 GMT, the USD/JPY is trading 110.631, up 0.257 or +0.22%.

The Forex pair is also being supported by increased demand for higher risk assets and expectations of another dovish monetary policy statement by the Bank of Japan on Friday.

At 1800 GMT, the Fed will end its two-day meeting by announcing its second rate hike this year. The 25 basis point increase will bring the benchmark interest rate to 2.00%.

While the rate hike is widely expected, the market focus will be on whether the Fed signals tightening policy two more times in 2018, from three times indicated earlier this year.

On paper a hawkish Fed should be bullish for the USD/JPY. Rising interest rates should widen the spread between U.S. Government Bonds and Japanese Government Bonds, making the U.S. Dollar a more attractive investment.

Another way to look at it, the divergence between the monetary policies of the U.S. Federal Reserve and the Bank of Japan should continue to be bullish for the USD/JPY. This should be reaffirmed on Friday when the Bank of Japan leaves its benchmark interest rate near zero and maintains its accommodative policy.

Despite the bullish outlook for the USD/JPY, there are still some traders who believe gains could be limited if emerging market turmoil begins to escalate. If this does occur then the Dollar/Yen rally could be stopped in its tracks by increased demand for safe haven assets.

Additionally, there were no reports from Japan on Wednesday. In the U.S. Producer Price Inflation is expected to come in at 0.3% and Core PPI at 0.2%.