USD/JPY Fundamental Daily Forecast -Strong US Retail Sales, Hawkish Fed Minutes Should Revive Bullish Tone

The Dollar/Yen is trading flat early Wednesday as traders await the release of the latest U.S. retail sales report and the minutes from the Federal Open Market Committee’s (FOMC) July meeting.

The U.S. Dollar has performed well since the August 10 consumer inflation report flipped the probability of a 75 basis point rate hike to a 50 basis point rate hike at the Fed’s September meeting.

Since then, the Forex pair has strengthened on the back of hawkish comments from several Fed members and steady economic data that indicates the U.S. economy is not softening fast enough to prevent another rate hike by the central bank.

Traders are also saying that looser financial conditions as benchmark 10-year Treasury yields hold below 3% and as the credit and stock markets improve has increased speculation the Fed may need to be more aggressive in tightening conditions to address rising price pressures.

At 04:22 GMT, the USD/JPY is trading 134.169, down 0.076 or -0.06%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.67, down $0.50 or -0.71%.

Domestic Data Indicates the Economy Needs a Stimulus Lift

Today’s mixed batch of data provides some evidence of resilience, but it still means the country needs another round of stimulus to help the economy shake off the hit from the pandemic and as the global economy moves closer toward recession.

Japanese manufacturers’ business confidence improved in August after last month’s stall, while service-sector firms’ mood rose for a second month to the highest point in nearly three years, the Reuters Tankan poll showed.

The report indicates demand is returning despite high commodity inflation.

However, in other news, Japan’s imports jumped to a record amount in July, boosted by global fuel inflation and a weak Yen. The news outweighed exports and deepened the trade deficit, in a sign of further worsening in the terms of trade for the export-oriented economy.

The biggest fear is that the worldwide tightening of monetary policy will slow down the global economy, sap corporate appetite for investment and drive down Japan’s export-led economy.

Daily Forecast

The direction of the USD/JPY is likely to be determined by the direction of Treasury yields following the release of the U.S. retail sales report at 12:30 GMT and the minutes of the Fed’s July meeting at 18:00 GMT.

A bullish U.S. Retail Sales report is likely to drive up Treasury yields and the chances of a 75 basis point rate hike in September. This would be good news for USD/JPY bulls. Weak data will drive the Dollar/Yen lower, but losses could be limited because of the upcoming Fed minutes.

Given the recent hawkish comments from several Fed officials, I expect the Fed minutes to confirm that policymakers will continue to raise rates aggressively until inflation reaches the mandated 2% level.

A bearish surprise for the Dollar/Yen will be the news that the Fed discussed pulling back on its aggressive rate hiking scheme out of fear of a recession.