USD/JPY Fundamental Daily Forecast – Still in Risk-Off Mode

The Dollar/Yen is trading lower on Friday after posting a posting a potentially bearish technical chart pattern the previous session in reaction to weaker-than-expected U.S. economic data and general concerns over an important Brexit vote this week, and the lack of progress in U.S.-China trade relations. Traders are getting their signal from a dip in U.S. Treasury yields and lower demand for risky assets. Both of which indicate safe-haven demand for the Japanese Yen.

At 07:19 GMT, the USD/JPY is trading 108.565, down 0.077 or -0.07%.

Brexit News Whipsaws Dollar/Yen

On Thursday, positive news about a Brexit deal drove global equity markets higher and demand for the safe-haven Japanese Yen lower. However, the rally stalled after traders realized that the deal still has to be approved by the U.K. parliament. This drove investors back into the Japanese Yen for protection.

“At the moment, the parliamentary arithmetic is somewhere between “extremely tight” and ‘no’” said Constantine Fraser, a political analyst at TS Lombard. But the “main takeaway is that the Conservative party is now committed to this deal, not no-deal, and will campaign for a majority for it.”

Weak U.S. Economic Data Raises Chances of Fed Rate Cut

While most of the world was focused on Brexit and the progress of U.S.-China trade talks on Thursday, the U.S. released a number of economic data reports, ahead of speeches from a pair of Federal Open Market Committee members.

With less than two weeks to go before the U.S. Federal Reserve interest rate decision on October 30, every economic report will take on added importance especially with the manufacturing sector weakening, the labor market showing signs of softening and inflation still coming in below expectations.

On Thursday, the Philadelphia Fed Manufacturing Index, Housing Starts, Industrial Production and Capacity Utilization, all came in below expectations.

As of Thursday’s close, the CME Fed Watch Tool estimates the chances of a Fed rate cut at the end of the month at 85.0%.

China Lays Out Terms for Ultimate Trade Deal

China emphasized Thursday that the U.S. must remove tariffs in order for the two countries to reach a final agreement on trade, Ministry of Commerce spokesman Gao Feng said.

“We hope both sides can continue to work together to advance the negotiations and, as soon as possible, reach a phased agreement and make new progress on canceling tariffs,” Gao said.

Worries over a U.S.-China trade deal are likely to limit stock market and USD/JPY gains until phase 1 of the partial trade deal is signed, which may not occur until next month.

Daily Forecast

The direction of the Dollar/Yen on Friday is likely to continue to be determined by the direction of Treasury yields and demand for risk. Both are likely to decline if worries over Brexit and a trade deal escalate.

Overnight, stocks are trading weaker following the release of weaker-than-expected GDP figures from China.

China released third-quarter GDP figures on Friday showing the economy grew 6.0% from a year ago. This was weaker than analyst expectations for a 6.1% gain. Beijing’s protracted trade dispute with the U.S. has weighed on its economy, with growth slowing to 6.2% in the last quarter, its slowest pace in 27 years.

Look for the USD/JPY to weaken if today is a “risk-off” session, and for the Forex pair to rally if risk is back on.

Given the weak data from China and the uncertainty over Brexit, The USD/JPY is going to have a hard time mounting a rally.