USD/JPY Fundamental Daily Forecast – Sideways Trade Suggests Renewed Concerns Over Fed Rate Hike Pace

The Dollar/Yen is trading flat early Monday and inside Friday’s range, suggesting investor indecision and impending volatility. Prior to today’s early tight range, the Forex pair was in a two-day freefall, fueled by less-hawkish comments from Federal Reserve Chairman Jerome Powell last Wednesday.

However, the selling pressure seems to have subsided following Friday’s hotter-than-expected U.S. Non-Farm Payrolls report. The unexpected jump in the number of jobs added in November and a surge in wages had some traders changing their tune over whether the Fed will be able to slow the size of rate hikes in December like Powell suggested.

Today’s early price action suggests investors may be waiting for further confirmation of a weakening economy. The U.S. ISM Services PMI report, due to be released at 15:00 GMT, should be another piece of the puzzle that will influence the Fed’s next move. Next week’s U.S. consumer inflation report on Dec. 13 will be the final piece since the Fed is scheduled to meet on Dec. 13-14.

At 04:33 GMT, the USD/JPY is trading 134.357, up 0.022 or +0.02%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.46, up $0.47 or +0.68%.

Bearish Catalyst:  Powell Says Smaller Interest Rate Hikes Could Start in December

Although the groundwork for the current sell-off in the USD/JPY was laid over a month ago when the U.S. Unemployment Rate surprisingly jumped in October and during the same month, the consumer price index cooled more than expected, we didn’t see a lot of selling pressure throughout November despite less-hawkish Fed minutes and chatter from several Fed speakers about the possibility of a slower pace of rate hikes moving forward.

Sellers were a little reluctant to pressure the USD/JPY after some officials warned that rates will continue to rise until inflation falls to an acceptable level. This changed on Nov. 30 when Fed Chairman Powell confirmed that smaller interest rate increases are likely ahead and could start in December.

Powell’s less-hawkish tone drove down Treasury yields, tightening the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive asset while driving up demand for the Japanese Yen.

Short-Term Outlook

The daily chart is bearish with the USD/JPY crossing to the weak side of a key retracement zone at 136.135 – 139.154 late last week. This area is now new resistance. Technically, the selling pressure is likely to remain strong as long as the Dollar/Yen remains below this area. The daily chart also indicates the possibility of an acceleration to the downside since the next major support is the May 24 main bottom at 126.362.

Fundamentally, the USD/JPY will be influenced by economic reports and Fed policy decisions. As long as the U.S. economic data continues to show slowing growth, the Fed is likely to maintain a series of 50-basis point rate cuts starting in December. This should keep the pressure on the USD/JPY.

Friday’s strong Non-Farm Payrolls report raised some concerns over whether the Fed can afford to slow down the pace of rate hikes at this time, however, it was only one report. Fed officials aren’t likely to change their minds about a possible 50 basis rate hike in December unless next week’s consumer inflation report comes in well above expectations.