USD/JPY Fundamental Daily Forecast – Weak Until Investors Get More Clarity on Fed Rate Hike Timetable

The Dollar/Yen is trading lower for a fourth straight session early Tuesday as traders continue to react to last Wednesday’s monetary policy decisions. Although the Fed announced it would begin tapering its massive stimulus, policymakers wavered on when the central bank would make its first post-pandemic rate hike. This dovish decision was accompanied by similar decisions from the Reserve Bank of Australia and the Bank of England.

Essentially, it’s softer global yields that are driving the Japanese Yen higher. This move is being fueled by traders paring back on some of their aggressive bets on imminent higher interest rates.

At 03:58 GMT, the USD/JPY is trading 112.833, down 0.386 or -0.34%.

U.S. Treasury yields initially rose and the curve steepened last Wednesday after the Federal Reserve, as expected, said it would commence tapering asset purchases this month, but stuck with its contention that high inflation would be transitory and not likely to lead to a faster rise in interest rates.

Last Friday, U.S. Treasury yields tumbled and the curve flattened in choppy trading amid uncertainty as to how the latest employment data, which showed job growth surged more than expected in October, could affect the timing and size of future Federal Reserve rate hikes.

With the jobs data out of the way, the focus now shifts to U.S. inflation numbers. Data on producer prices on Tuesday and consumer prices on Wednesday could sway traders’ thinking on the outlook for interest rates.

Fed Officials Turn Focus to Rate Debate, Eye on Jobs, Inflation

U.S. Federal Reserve officials on Monday turned their focus toward a debate over monetary policy that will heat up in coming months as the Fed slows the pace of its asset purchases, clearing the decks for interest rate hikes as soon as next year.

At the center of the debate will be an assessment of how many more jobs the economy can add, and how much longer high inflation can be tolerated, given that the rate of price increases is already pushing beyond comfortable levels.

Fed Vice Chair Richard Clarida said that while the U.S. central bank remains “a ways away from considering raising interest rates,” if his current outlook for the economy proves correct, then the “necessary conditions for raising the target range for the federal funds will have been met by year-end 2022.”

Inflation to date already presents “much more than a ‘moderate’ overshoot of our 2% longer-run inflation objective, and I would not consider a repeat performance next year a policy success,” Clarida.

St. Louis Federal Reserve Bank President James Bullard repeated his outlook that the Fed will need to raise rates twice next year – with U.S. job markets already so tight it is adding to inflation through growing wage and compensation costs.

Short-Term Outlook

Fed officials aren’t certain yet about when to raise rates and Friday’s strong Non-Farm Payrolls report is just one piece of data. So the focus shifts to the U.S. consumer inflation report on Wednesday. A stronger than expected number would likely be supportive for the USD/JPY. This is because investors would once again start playing bets on an earlier than expected Fed rate hike.