USD/JPY Fundamental Daily Forecast – Solid CPI Data, Faster Rate Hikes Should Trigger Breakout to Upside

The Dollar/Yen is trading lower early Wednesday after reaching its highest level since November 9 the previous session. Investors are being cautious ahead of a report on U.S. consumer inflation and the U.S. Federal Reserve’s interest rate decision and monetary policy statement. The dollar is also under pressure after a Democrat won a bitter fight for a U.S. Senate seat.

At 0934 GMT, the USD/JPY is trading 113.334, down 0.209 or -0.18%.

The USD/JPY is trading lower in response to a weaker U.S. Dollar. The catalyst behind the price action is the win by Democrat Doug Jones over Republican Roy Moore. Jones’ victory is seen as a political setback to President Trump. His election cuts the Republican’s Senate majority from 52 to 51 and puts at risk several of Trump’s economic plans.

The Senate election news could pressure the USD/JPY early in the session, however, later in the day, the emphasis will shift to the Fed’s interest rate decision and monetary policy statement.

The U.S. Federal Reserve has raised its benchmark interest rate two times so far this year and analysts say a third rate hike is almost certain, by 25 basis points to between 1.25 and 1.50 percent, at the conclusion of its two-day meeting at 1900 GMT.

With the rate hike a given, Dollar/Yen traders will be primarily focused on the U.S. central bank’s statement for clues on any further rate increases in 2018. Earlier in the year, the Fed forecast as many as three rate hikes, but concerns over sluggish inflation has led some Fed officials to lower their projections to only two rate hikes. A cut in the number of rate hikes in 2018 could trigger further weakness in the USD/JPY.

At 1330 GMT, investors will get the opportunity to react to the latest U.S. consumer inflation data. It is expected to show an increase of 0.4%. Core CPI is expected to rise 0.2%. On Tuesday, the U.S. reported that producer price data for November rose 0.4 percent. This met expectations. From a year ago, the producer price index shot up 3.1 percent, the biggest gain since January 2012 and followed a 2.8 percent rise in October.

If U.S. consumer price data shows a similar uptick, that could fuel expectations of faster Fed rate hikes in 2018. The USD/JPY could soar on this news. A lower number will be bearish for the Forex pair.