USD/JPY Fundamental Daily Forecast – Risk Appetite Driving Price Action; Watch Apple Report After Close

The Dollar/Yen was pressured on Monday due to expectations of a dovish U.S. Federal Reserve and safe-haven buying of the Japanese Yen in reaction to a weaker U.S. stock market. Worries over the weakening Chinese economy also drove investors into the safety of the Yen. The main catalyst of the price action was disappointing U.S. corporate earnings.

On Monday, the USD/JPY settled at 109.325, down 0.220 or -0.20%.

The trading session started with the Dollar/Yen under pressure on expectations of a more dovish U.S. Federal Reserve at this week’s two-day Federal Open Market Committee meeting which begins on Tuesday and ends on Wednesday with the announcements of its interest rate and monetary policy decisions.

The Fed is widely expected to leave its benchmark unchanged. It may announce changes to its program to reduce its balance sheet. This would indicate that it is serious about ending its tightening cycle. Both move are being perceived as bearish for the U.S. Dollar.

Weak Stock Market Increases Demand for Safe-Haven Protection

A steep intraday drop in U.S. equities helped drive investors out of risky assets and into the safe-haven Japanese Yen. The broad-based market fell in reaction to weaker-than-expected quarterly earnings and guidance from Caterpillar, as well as a big revenue forecast cut from chipmaker Nvidia.

The bad earnings news raised fears over the impact of the weakening economy in China on the global economy. Caterpillar said in its report that its sales in the Asia/Pacific region declined because of lower demand in China. Nvidia said “deteriorating macroeconomic conditions, particular in China,” impacted demand for its graphics processing units.

Forecast

Gains are likely to continue to be capped by expectations of a dovish Fed on Wednesday. The USD/JPY will feel even more pressure if the stock market continues to weaken. The selling pressure could slow, however, if demand for risky assets increases later this week.

Earnings will be at the forefront all week with more than 100 S&P 500 companies scheduled to report. Of particular importance will be the earnings results from Apple, Amazon and Microsoft. Apple will be watched the closest and its report should have the biggest impact on the stock market and consequently on the Japanese Yen. The company has the most exposure in China amongst the technology giants and has already warned about revenue.

Apple is scheduled to release quarterly earnings after the bell on Tuesday in a report that could make or break the stock market. The USD/JPY could rally if impressive earnings from Apple triggers a stock market rally. The Forex pair could tumble if Apple disappoints.

Weaker-than-expected earnings from Apple combined with the Caterpillar and Nvidia numbers will serve as further proof that the weakening economy in China is real and having a negative effect on the global economy.