USD/JPY Fundamental Daily Forecast – Steady After Fed Calls Inflation ‘Transitory’, Keeps Rate Hike on Hold

The Dollar/Yen is edging higher early Thursday on the back of a slight rise in Treasury yields. This follows a small gain from the previous session. The Forex pair rose on Wednesday despite a less-hawkish Federal Reserve monetary policy statement.

At 01:53 GMT, the USD/JPY is trading 114.234, up 0.216 or +0.19%.

Fed Disappoints the Bulls

The USD/JPY rose ahead of the Fed announcements on Wednesday as traders priced in the possibility policymakers would commit to a rate hike timetable. However, the dollar eased against the Japanese Yen after the Fed said it would begin unwinding its pandemic-era stimulus, but held to its belief that high inflation would prove “transitory” and likely not require a rapid rise in interest rates.

Ahead of the Fed’s decisions, traders were expecting the central bankers to approve plans to scale back its $120 billion monthly bond-buying program put in place to help the economy during the coronavirus pandemic, while investors were also be focused on commentary about interest rates and how sustained the recent surge in inflation is.

Throughout the week, traders continued to increase their expectations that high and persistent inflation would force the Fed to raise interest rates sooner and faster than policymakers have projected. Contracts in Federal Funds futures now imply three quarter-point rate increases next year, versus two as of late last week, according to data from the CME Group’s FedWatch.

Goldman Sachs even brought forward its forecast by a year to July 2022 for the first post-pandemic U.S. interest rate hike, as the investment bank expects inflation to remain elevated.

The Fed probably disappointed the bulls when it announced a $15 billion monthly cut to its $120 billion in monthly purchases of Treasuries ad mortgage-backed securities, but did little to signal when it may begin the next phase of policy “normalization” by raising interest rates.

Short-Term Outlook

The focus now shifts to the U.S. labor market since this is one of the factors the Fed would like to see improve before it starts raising rates.

Private sector job creation popped higher in October thanks to a burst in hiring in the hospitality sector, payroll processing firm ADP reported Wednesday.

Companies added 571,000 for the month, beating the 395,000 Dow Jones estimate and just ahead of September’s downwardly revised 523,000. It was the best month for jobs since June.

On Thursday, traders will get the opportunity to react to the latest report on Weekly Jobless Claims. According to the estimates, Weekly Unemployment Claims likely fell to 273K, down from the previously reported 281K.

On Friday, the government’s Non-Farm Employment Change report is expected to show the economy added 455K jobs in October. The Unemployment Rate is expected to edge lower from 4.8% to 4.7%. Average Hourly Earnings are expected to rise 0.4%.