USD/JPY Fundamental Daily Forecast – Traders Focused on Yields, Risk Appetite, Fed Minutes

The Dollar/Yen is trading slightly lower early Wednesday and inside yesterday’s wide range. Volume is light as investors prepared for the release of the minutes from the U.S. Federal Reserve’s monetary policy meeting at 18:00 GMT.

The Forex pair sold-off sharply on Tuesday as Treasury yields declined and stock prices were pressured by lower demand for risk on increasing concerns over the strength of the global economy after the International Monetary fund cut its growth outlook.

At 06:38 GMT, the AUD/USD settled at .7148, up 0.0022 or +0.31%.

IMF Reduces Global Economic Growth Forecast

On Tuesday, the International Monetary Fund, once again, slashed its global economic growth forecast for 2019, blaming risks from increasing trade tensions and tighter monetary policy by the U.S. Federal Reserve.

The IMF said it expects the world economy to grow by 3.3% in 2019, down from its previous estimate of 3.5%, which was also a downgrade. The fund also added that it expects the economy to expand by 3.6% in 2020, however.

“The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”

“Higher trade policy uncertainty and concerns of escalation and retaliation would reduce business investment, disrupt supply chains, and slow productivity growth,” according to the IMF. “Resulting depressed outlook for corporate profitability could dent financial market sentiment and further dampen growth.”

The IMF also talked about risks to the global economy. Essentially, while the financial markets seem to be pricing in a U.S.-China trade deal, the IMF warned, a failure to strike a deal would hurt the U.S. economically and would also derail China’s efforts to reinvigorate its economy. The IMF also cited risks over a no-deal Brexit and political uncertainty over elections and geopolitical tensions in East Asia.

Finally, the IMF issued a warning about Fed policy. “The market-implied path of expected policy rates remains below the Federal Open Market Committee’s projections, raising the possibility of a market reassessment of the expected policy path if US economic data remain strong. This could result in higher US interest rates, renewed dollar appreciation, and tighter financial conditions for emerging market and developing economies with balance sheet vulnerabilities.”

Daily Forecast

Earlier today in Japan, a report showed Bank Lending rose 2.4%, beating the 2.3% forecast. Core Machinery Orders came in lower than expected at 1.8% and producer inflation rose 1.3%.

Later today, investors will get the opportunity to react to a U.S. report on consumer inflation at 12:30 GMT. CPI is expected to have increased by 0.3%. Core CPI is expected to have risen by 0.2%.

At 18:00 GMT, the Fed minutes aren’t expected to reveal any surprises about the course of interest rates. According to Bloomberg, “An important focal point of the minutes will be to determine the extent to which Fed officials expect the sources of recent economic weakness to be transitory.”

Translation: The Fed minutes may let us know if central bank policymakers expect the economic weakness seen in some reports to develop into a trend.

There is also expected to be some discussion on inflation. Furthermore, Fed Chair Jerome Powell said he’s not worried about a tight labor market fueling higher wages, however, the minutes could provide some elaboration of these views.

Finally, investors will be looking for any FOMC comments about a flattening yield curve and its potential recession warning.