USD/JPY Fundamental Daily Forecast – Traders Focusing on Fed Policy Outlook

The Dollar/Yen is trading slightly lower early Wednesday as many of the major players have taken to the sidelines ahead of the release of a pair of U.S. economic reports and the U.S. Federal Reserve monetary policy statement and interest rate decision.

On Tuesday, the Forex pair posted a potentially bearish chart pattern after touching its highest level since August 1. The move may have temporarily shifted momentum to the downside. Not only are investors prepping for the Federal Reserve decisions, but they’re also getting ready for the Bank of Japan’s decisions on October 31.

Today’s Fed announcements should have a strong effect on the U.S. Dollar, Treasury yields and demand for risk. Traders are also paying close attention to the trade talks between the U.S. and China. After making strides the past two weeks, there is a report that they may have hit a snag.

At 08:37 GMT, the USD/JPY is trading 108.829, down 0.059 or -0.05%.

U.S. Economic Data

On Tuesday, the U.S. posted mixed economic news. A report on home prices weakened marginally. Data on home sales showed an unexpected gain and a report on consumer confidence disappointed.

The Conference Board Consumer Confidence fell to 125.9 in October versus an estimate of 128.0. Economists polled by Reuters had forecast it rising to 128.0 in October.

“Consumer confidence was relatively flat in October, following a decrease in September”, said Lynn Franco, the group’s head of economic indicators, said in a statement.

The report demonstrated that the grinding trade conflict has undermined business confidence, crimped investment and caused consumers to worry more as well.

U.S. Federal Reserve Decisions

The U.S. Federal Reserve is expected to cut its policy rate for a third time in a row when it concludes its two-day meeting on Wednesday. Federal Funds data shows the central bank is expected to take a pause in December then make another cut early next year, taking its benchmark rate to 1.50% – 1.75%.

U.S.-China Trade

Hope that Washington and Beijing would finalize the first-stage of a trade deal in November had boosted risk assets in recent days, but traders are now worried on the prospect this could be delayed. A U.S. administration official said on Tuesday an interim trade agreement between the United States and China might not be completed in time for signing on the sidelines of an Asia-Pacific summit in Chile next month, but that does not mean the accord is falling apart.

Daily Forecast

With the Fed rate cut completely priced in, traders will be looking at the Federal Reserve’s stance on its policy outlook. We may see a mild reaction if the Fed signals more easing in early 2020. This may have also been priced in somewhat. However, if the Fed doesn’t signal further easing then this will be perceived as hawkish, and the USD/JPY could rally sharply higher.

Basically, the degree of hawkishness or dovishness by the Fed will drive the price action. Signaling two rate cuts for next year could drive the Dollar/Yen to 107 over the near-term, while signaling an end to the current-easing cycle could trigger a near-term rally to 110.