USD/JPY Fundamental Daily Forecast – Risk-On, Risk-Off Flip Signals Heightened Volatility Imminent

The Dollar/Yen is trading higher on Thursday as broad-optimism over COVID-19 vaccines took a back seat to worries about risking coronavirus infections in the United States and Europe and risks to the fragile global economic recovery.

The price action in this Forex pair over the last two weeks clearly indicates that the greenback is trapped between two opposing forces – one is the viewpoint that the U.S. Dollar is a safe-haven currency, the other supporting the notion that fresh monetary support from the Federal Reserve to boost the economy will weaken the dollar.

Today’s gains reflect the appeal of the U.S. Dollar as a safe-haven currency.

At 09:50 GMT, the USD/USD is trading 104.037, up 0.245 or +0.24%.

Vaccine Hopes, COVID-19 Worries Driving Price Action

Since last week’s steep plunge, the Japanese Yen has recouped nearly three-quarters of the steep loss it suffered last week when Pfizer announced its COVID-19 vaccine. Rising coronavirus cases in the U.S. has caused enough concern about U.S. economic growth prospects to make the Yen a more attractive asset.

Also pressuring the greenback has been chatter over more easy money from the U.S. Federal Reserve. On Wednesday, the Fed’s Bostic said, “We are prepared to step in with more policy help if needed.”

“We are committed to using all of our tools. They have some juice and we’ll deploy them as necessary,” Atlanta Fed President Raphael Bostic told CNBC’s “Squawk Box” Tuesday. “The retail sales number gives us a sign, but there are lots of other things that we’re going to learn between now and then and that will give us some guidance as to how we should think about our next move in terms of assets.”

Daily Forecast

The USD/JPY could face a mountain of volatility over the near-term as traders assess the impact of the vaccine, the rising number of coronavirus cases and the possibility of further easing by the U.S. Federal Reserve.

A steep plunge in demand for riskier assets could drive investors into the safety of the U.S. Dollar, while further easing by the Fed would likely weaken the greenback. Essentially, traders will be betting on whether the vaccine arrives in time to underpin the global economy, or the number of infections rises so fast as to derail the global economic recovery.

On Wednesday, the Fed’s Bostic summed it up this way, “We have short-term and intermediate-term concerns with the spike in the virus and what that is going to do in terms of businesses and the things that they are able to produce, in terms of consumers in terms of their willingness to go out and buy things. … That is paired with some medium-term positive signs” that a possible vaccine could reinvigorate the economy next year, Bostic said in comments to CNBC.

The vaccine is definitely positive news and it will definitely lead to a pretty robust recovery once it gets into the population deep enough,” Bostic said. But as the Fed’s December 15-16 meeting approaches, “we are going to be paying really close attention to the numbers moving forward to see whether this weakness in retail sales translates into something more deep.”

Some investors expect the Fed at that meeting to change its bond buying program to provide more support to the economy in response to the renewed outbreak.

For a look at all of today’s economic events, check out our economic calendar.