USD/JPY Fundamental Daily Forecast – Stronger Amid Concerns Fed May Not Sound as Dovish as Previously Expected

The Dollar/Yen is trading higher on Monday as traders adjust positions ahead of this week’s interest rate and monetary policy statements from the U.S. Federal Reserve and the Bank of Japan. Increased demand for risky assets is also helping to support the Forex pair as stock market investors resume borrowing from Japanese banks and investing in U.S. equities.

At 10:51 GMT, the USD/JPY is trading 108.705, up 0.143 or +0.13%.

The dollar continues to rise against the Japanese Yen in reaction to Friday’s strong U.S. economic data which led investors to reassess whether the Fed will sound as dovish as expected as anticipated earlier in the week at this week’s monetary policy meeting.

Friday’s stronger-than-expected U.S. retail sales report reduced the chances of an interest rate cut this week, lifting the U.S. Dollar. Nonetheless, in its monetary policy statement, Fed Chairman Jerome Powell is expected to leave open the possibility of future rate cuts.

Expectations of an interest rate cut at the Fed’s June 18-19 meeting fell from 28.3% on Thursday to 21.7% after the retail sales data, according to CME Group’s Fed Watch tool. However, bets for monetary easing at the July meeting remain at 85% and at 70% probability of another reduction in September.

Last week’s economic reports were mixed but the reduction in the chances of a June rate cut indicates that investors don’t expect a rate cut from the Fed at this meeting because the economy is still relatively strong. Some investors feel the need for a rate cut has been driven by trade and geopolitical events and not a weaker economy. However, they are still not certain how “dovish” the Fed will actually sound in its monetary policy statement. Some also believe the Fed runs a risk at sounding “too hawkish”.

According to RBC strategist Elsa Lignos, “Markets are pricing a high probability of a July cut, despite there being unusually high uncertainty, particularly around trade. We find it hard to believe that the Fed would cut rates if post-G20, for example, there were a de-escalation of tensions with China (simply a resumption of talks).”

At this time, it looks as if the markets are willing to concede the Fed will drop the word “patient” in its monetary policy statement, but even a rate cut in July is not a certainty because market sentiment could change rapidly to positive if the U.S. and China decide to resume trade talks after a proposed meeting between U.S. President Trump and Chinese President Xi Jinping takes place at the G20 summit.