USD/JPY Fundamental Daily Forecast – Strengthens Over 112.022, Weakens Under 111.655

The Dollar/Yen is trading higher on Tuesday in a volatile two-sided session that saw the formation of an outside move as traders had a hard time deciphering the impact of additional tariffs on China by the U.S. Traders that sold the Dollar/Yen were banking on lower demand for risky assets. They were forced to cover their intraday shorts when a steep sell-off in global equity markets failed to materialize.

At 0901 GMT, the USD/JPY is trading 111.952, up 0.090 or +0.08%.

Technical factors are also playing a role in the price action with the USD/JPY currently straddling a major 50% to 61.8% retracement zone at 111.655 to 112.022. Based on the price action over the past six weeks, the near-term direction of the Forex pair is likely to be determined by trader reaction to this zone.

In the U.S. on Monday, the Empire State Manufacturing Index came in at 19.0. This was below the 23.2 estimate and 25.6 previous read. However, this report did not have the same impact on prices as the announcement of additional tariffs on China.

On Monday, President Trump said that he will impose 10 percent U.S. tariffs on about $200 billion worth of Chinese imports, effective September 24.

Trump also said that if China takes retaliatory action against U.S. farmers or industries, “we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”

Despite the threat from Trump, the focus will shift towards China’s response to the announcement. Most analysts expect China to attempt to disrupt the U.S. supply chain with components for technology devices an obvious target as well as raw materials used to make certain devices. Furthermore, the country may even announce the cancellation of trade talks.

Forecast

Due to the uncertainty over the timing of China’s possible retaliation to the new tariffs, traders are likely to keep their fingers pressed to the volatility button so we expect to continue to see possible two-sided trading until they get some clarity.

We’re going to approach this market today by watching the price action in the Treasurys. If Treasury yields rise then the USD/JPY is likely to feel downside pressure. If Treasury yields move lower then look for renewed pressure on the USD/JPY. This is the easiest way to trade and it beats trying to read and interpret the ever-changing headlines.

We could also be looking at position-squaring ahead of the Bank of Japan’s interest rate and monetary policy decisions on Wednesday.

If you want to revert to the daily chart, look for an upside bias to develop on a sustained move over 112.002, and a downside bias to develop under this level.

Looking at the bigger picture, look for the USD/JPY to strengthen over 112.022 and weaken under 111.655.