USD/JPY Fundamental Daily Forecast – Weakens on Easing Tensions Over Brexit, Heightened Stock Market Volatility

The Dollar/Yen weakened on Wednesday, driven by lower demand for risky assets and an easing of tensions over Brexit. Stronger-than-expected U.S. inflation data may have limited the loss.

Stocks were hit hard again, prompting the carry trade to kick in with U.S. investors selling dollars to buy Japanese Yen in order to pay back loans made with Japanese banks. The news that the UK and the EU were close to an agreement over Brexit prompted investors to dump dollar positions bought as safe-haven protection.

On Wednesday, the USD/JPY settled at 113.634, down 0.171 or -0.15%.

Stock Market Weakness Fuels Carry Trade

The major U.S. equity markets finished lower on Wednesday as shares of Apple continued to lead the charge to the downside. Steep losses in bank stocks also contributed to the declines. Heightened volatility was the theme in the market with the benchmark S&P 500 Index closing lower for a fifth straight session. The blue chip Dow posted a more than 600 point range before closing nearly 206 points lower. The tech-driven NASDAQ Composite also suffered another loss.

Brexit News Drives Investors Out of Safe-Haven U.S. Dollar

An improvement in risk sentiment helped drive the Japanese Yen higher on Wednesday after British Prime Minister Theresa May said she had obtained enough support for her proposed Brexit deal to move forward.

“I firmly believe that the draft withdrawal agreement was the best that could be negotiated, “May told reporters in London. “The choices before us were difficult … but the collective decision by Cabinet was that the government should agree the draft withdrawal agreement and the outlying political declaration.”

In other news, U.S. consumer prices increased by the most in nine months in October amid gains in the cost of gasoline and rents, pointing to steadily rising inflation that likely will keep the Federal Reserve on track to raise interest rates for a fourth time this year in December.

According to the U.S. Labor Department, the Consumer Price Index rose 0.3 percent last month after edging up 0.1 percent in September. In the 12 months through October, the CPI increased 2.5 percent, picking up from September’s 2.3 percent rise. Investors were looking for a 0.3 percent increase.

Forecast

There is no major news from Japan on Thursday, but investors will be keying in on a slew of U.S. economic reports including Core Retail Sales, Retail Sales, the Philadelphia Fed Manufacturing Index, the Empire State Manufacturing Index, Import Prices, Weekly Unemployment Claims and a speech by FOMC Member Randal Quarles.

Core Retail Sales are expected to have risen 0.5% in October. This will be an improvement from September’s -0.1%. Retail Sales are expected to have risen 0.6% last month, up from 0.1%.

The Philadelphia Fed index is expected to come in at 20.1, down from 22.2. The Empire State Manufacturing Index is also expected to dip to 19.9 from 21.1. Import Prices are expected to show a 0.1 gain.

Weekly Jobless Claims are estimated at 213K, down slightly from 214K.

Traders aren’t expected to pay too much attention to the reports. The main focus will be on the direction of the U.S Dollar, which is being dominated by the Euro and optimism over a Brexit deal. Safe-haven buying due to the weaker stock market could also drive investors into the Japanese Yen.

The longer-term outlook remains bullish for the U.S. Dollar due to the divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan.

However, the short-term outlook tends to favor the Japanese Yen because of the heightened volatility in the riskier assets and the easing of tensions in Europe.