USD/JPY Fundamental Daily Forecast – Tapering, Rate Hike Pace New Focus for Traders

The Dollar/Yen is edging lower early Tuesday, but remained not far from the almost three-year high of 114.470 touched on Friday. The U.S. currency is being pressured by a dip in U.S. Treasury yields tied to a report from Monday showing weaker than expected manufacturing output.

At 06:52 GMT, the USD/JPY is trading 114.048, down 0.273 or -0.24%.

With the market already fully pricing the start of Fed tapering in November and its first interest rate hike in mid-2022, the U.S. Dollar is likely to become more sensitive to fresh economic data as investors try to gauge the pace of tapering and future rate hikes. We saw a little of this on Monday with the release of U.S. reports on housing and factory output. These reports followed Friday’s robust U.S. retail sales report, which helped launch the Dollar/Yen to nearly a three-year high.

Tapering Pace Could Be Next Rally Driver

Last week, St. Louis Federal Reserve President James Bullard advocated for the central bank to be aggressive as it starts winding down its monthly bond-buying program in case inflation becomes a larger problem.

Stronger-than-expected economic data over the near-term could influence the Fed to taper faster, which would bring it closer to hiking interest rates. Both moves would be bullish for the Dollar/Yen.

In a CNBC interview, Bullard said he thinks it’s a 50-50 chance that the current inflation pressures are transitory, so policymakers have to be ready.

The Fed is largely expected to announce next month it will begin tapering minimum $120 billion a month asset purchase program, with a target date probably by mid-2022.

Bullard said he’d like to see more faster action.

“I’d support starting the taper in November,” he said on “Closing Bell.” “I’ve been advocating trying to get finished with the taper process by the end of the first quarter next year because I want to be in a position to react to possible upside risks to inflation next year as we try to move out of this pandemic.”

Fed officials say they’d prefer to have the tapering finished before rate hikes start.

US Dollar Pressured as Manufacturing Output Declines in September

Helping to weigh on the USD/JPY on Monday and early in today’s session is a report that showed production at U.S. Factories unexpectedly fell in September as motor vehicle output slumped amid an ongoing global shortage of semiconductors.

Manufacturing output dropped 0.7% last month, the Federal Reserve said on Monday. Data for August was revised down to show production falling 0.4% instead of rising 0.2% as previously reported. Economists polled by Reuters had forecast manufacturing production edging up 0.1%.

Daily Forecast

Economic data will be at the forefront again on Tuesday with the release of reports on Building Permits and Housing Starts. Weaker-than-expected reports will put new pressure on the USD/JPY.

The Dollar/Yen is also likely to be influenced by speeches by FOMC members Daily, Bowman, Bostic and Waller. Traders will be interested to hear what they have to say about the pace of tapering and future rate hikes.