USD/JPY Fundamental Daily Forecast -Underpinned by Safe-Haven Buying Tied to Geopolitical Tensions

The Dollar/Yen is edging higher on safe-haven buying early Wednesday as markets continued to assess news of a Russian-made rocket striking NATO-member Poland, and whether it could lead to an escalation of the Ukraine war.

Volatility could be an issue after yesterday’s performance where the Japanese Yen flipped from early gains to similar-sized losses when unconfirmed reports broke that two people in a Polish village had died in an explosion caused by Russian missiles near the border with Ukraine.

At 07:05 GMT, the USD/JPY is trading 139.655, up 0.340 or +0.24%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) is at $67.05, up $0.21 or +0.31%.

Markets on Heightened Alert

The global risk markets have calmed since the initial incident, however, after the president of Poland said his government doesn’t yet conclusively know who fired a missile that struck Polish territory.

President Andrzej Duda said the projectile was “Russian-made” and variously referred to it as either a missile or a rocket.

“What happened was an isolated incident,” said Duda, who added that an investigation is underway. “There is no indication that more will take place.”

Despite the downplaying of the attack, traders remain on heightened alert and the safe-haven U.S. Dollar could escalate against the Japanese Yen later in the session if an investigation proves Russia is responsible.

Early Weakness Fueled by Cooler US Producer Price Inflation

The USD/JPY fell to its lowest level since August 29 on Tuesday after U.S. producer prices increased less than expected in October as services fell for the first time in nearly two years, offering more evidence that inflation was startling to subside, potentially allowing the Federal Reserve to slow its aggressive pace of interest rate hikes.

Treasury yields fell on the news, making the U.S. Dollar a less-attractive asset.

Japan’s Sept Machinery Orders Unexpectedly Fall, Raising Capex Concerns

Domestically, Japan’s machinery orders unexpectedly fell in September in a sign the global economic slowdown and higher import costs are weighing on firms’ capital spending plans.

The government downgraded its view on machinery orders for the first time since February, saying the recovery is stalling. Previously, the government said there were signs the economy was picking up.

Short-Term Outlook

The uptrend is weakening as investors continue to liquidate long positions as the odds of a slowdown in the size of Federal Reserve rate hikes increases. However, short-sellers are going to have to be careful due to periodic counter-trend rallies caused by technically oversold conditions and geopolitical tensions.

Later today at 15:30 GMT, traders will get the opportunity to react to the latest data on U.S. Retail Sales. Although it’s not likely to move the market as much as an inflation report, it could still have an intraday impact on the U.S. Dollar.

Traders will be looking for evidence of a slowdown in consumer spending. On one hand, it could be an indication of cooling inflation. On the other, it could indicate a weakening economy.

U.S. Retail Sales are expected to have risen 1.00%, up from 0.00%. Core Retail Sales are expected to have risen 0.5%, up from 0.1%.