USD/JPY Fundamental Daily Forecast – Stabilizing Ahead of Wednesday’s U.S. GDP Report

The Dollar/Yen is trading slightly lower early Tuesday, but essentially treading water for a second day. Traders are seeking new guidance after last week’s rally died on Friday when Fed Chair Jerome Powell’s dovish speech raised issues about future rate hikes.

At 1108 GMT, the USD/JPY is trading 111.077, up 0.002 or +0.01%.

The price action suggests investors believe Powell hinted that the Fed was moving toward neutrality, which essentially means it is getting closer to curtailing the pace of rate hikes. At this time, the markets seem to have penciled in rate increases in September and December, but the number of rate hikes in 2019 is still up in the air.

The new trade deal with Mexico could also be helping to put a cap on any gains since it is encouraging those who bought the dollar as a safe haven investment to exit those positions.

Finally, there is some interest in the long side of the Japanese Yen because the Bank of Japan recently dropped hints that it is moving toward exiting its ultra-loose monetary policy.

In economic news, Bank of Japan Consumer Inflation Index (CPI), rose more than expected. The CPI came in at 0.5%, up from 0.4% and better than the 0.3% forecast

On a month-on-month basis the core consumer price index rose 0.1% in seasonally-adjusted terms in July, matching June’s result.

Core inflation stabilized at June’s 0.8% in July, which was below market expectations of 0.9%. Therefore, inflation remains well below the Bank of Japan’s inflation target of 2.0%. Overall inflation rose from June’s 0.7% to 0.9% in July, marking a four-month high.

Core inflation for Tokyo rose from 0.7% in June to 0.8% in July. Data on core inflation for Tokyo for August will be released on August 31.

If you recall, the median forecast among BOJ members is 1.3% for fiscal year 2018 and 2.3% for fiscal year 2019.

Forecast

Low volume is also contributing to the sideways price action. Some say activity is down because of Wednesday’s U.S. Preliminary GDP report. Others are saying that the major players are out of the market early due to the U.S. Labor Day holiday on Monday and may not return until September 7.

In the U.S. today, investors will get the opportunity to react to the latest reports on Goods Trade Balance, Preliminary Wholesale Inventories, S&P/CS Composite-20 HPI, Conference Board Consumer Confidence and the Richmond Manufacturing Index.

The USD/JPY will strengthen over 111.490, and weaken under 110.868.