USD/JPY Fundamental Daily Forecast – Strong Flight-to-Safety Buying Could Blast Dollar/Yen Through 112.208

The Dollar/Yen is trading higher early Wednesday amid concerns that additional tariffs from the U.S. on China will escalate the current trade dispute. Flight-to-safety buying today is driving prices higher on top of yesterday’s strong gains that were fueled by a dovish Bank of Japan monetary policy statement.

At 0621 GMT, the USD/JPY is trading 112.068, up .194 or +0.17%.

The Dollar/Yen opened steady on Wednesday as most traders began preparing for the release of the U.S. Federal Reserve’s interest rate decision and monetary policy statement. However, the tone changed quickly from neutral to bullish after a report surfaced stating that the Trump administration plans to propose slapping a 25-percent tariff on $200 billion of imported Chinese goods after initially setting them at 10 percent, in a bid to pressure Beijing into making trade concessions, a source familiar with the plan said on Tuesday.

The source also told CNBC that the Trump administration could announce the tougher proposal as early as Wednesday. The new plan more than doubles the tariff rate first reported by Bloomberg News on July 10.

In U.S. economic news on Tuesday, consumer spending in the U.S. rose by 0.4 percent in June, while personal income grew at the same rate. The Conference Board’s Consumer Confidence beat the estimate with a 127.4 reading.

Earlier in the session, the Bank of Japan ignited a rally by the USD/JPY after it decided to hold current policy in place. Traders interpreted this to mean that interest rates would remain low for a prolonged period. However, the central bank did indicate that it would make its policy framework more flexible when it comes to the long-term yield target.

Forecast

If flight-to-safety buying remains the theme throughout the session then look for a strong performance by the USD/JPY. Currently, the Forex pair is testing a key technical area at 111.899 to 112.208. If buyers should overtake this zone with conviction, then the Dollar/Yen could surge over 112.208. The daily chart indicates there is plenty of room to the upside with 113.210 the next likely target.

A trade back under 111.899 will indicate that investor sentiment has changed. This could trigger the start of a short-term pull-back.

Heightened concerns over the escalating trade war could make the Fed’s announcements non-events especially since the central bank is not expected to raise rates or make any drastic changes to policy.

Traders will also have the opportunity to react to the latest U.S. data on ADP Non-Farm Employment Change, Final Manufacturing PMI, ISM Manufacturing PMI, Construction Spending, ISM Manufacturing Prices and Total Vehicle Sales.

The reports and the Fed are not likely to trigger much of a response in the markets unless the central bank really offers some surprise news. We expect most of the volatility to be triggered if Trump makes the tariff announcement today. A sharply lower stock market could also increase demand for the safe-haven U.S. Dollar.