USD/JPY Fundamental Weekly Forecast – BOJ Decision, U.S. Government Shutdown, Key Market Drivers

The Dollar/Yen hit a four-month low on January 17 before rebounding late in the week. However, the Forex pair still managed to post a loss for the second straight week.

The USD/JPY settled the week at 110.801, down 0.196 or -0.18%.

U.S. Treasury yields finished the week on a high note, led by the 10-year Treasury Note which moved to its highest level since 2014 on Friday morning. The jump in yields corresponded with an underlining move in global bond markets caused by central banks moving away from financial crisis stimulus.

The yield on the 10-year reached 2.656 percent while the yield on the benchmark 30-year Treasury Bond rose to 2.928 percent.

The move may have helped underpin the USD/JPY.

Bank of Japan

Early in the week, Bank of Japan Governor Haruhiko Kuroda offered a positive view on the economy and inflation on January 15.

Kuroda said in a speech to BOJ regional branch managers that core consumer inflation was “moving around 1 percent,” a slight change from three months ago when he said core consumer prices were around zero.

“The economy is expected to continue expanding moderately,” he added, reiterating his optimism on prospects for a sustained recovery.

U.S. Economic Data

Disappointing investors last week were the Empire State Manufacturing Index, U.S. Housing Starts, the Philly Fed Manufacturing Index and Preliminary University of Michigan Consumer Sentiment.

Helping to support the dollar were Capacity Utilization, Industrial Production, Building Permits, Weekly Unemployment Claims and the Fed Beige Book.

The Fed Beige Book showed the U.S. economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher.

“Most districts said that wages increased at a modest pace,” the U.S. central bank said in its periodic Beige Book report on the economy. “A few districts observed that firms were raising wages in a broader range of industries and positions since the previous report.”

“Firms in some districts noted an ability to increase selling prices. Retailers in some districts reported modest price increases and there were reports of rising home prices across the country,” the Fed said.

Forecast

The big story of the week is likely to be the U.S. government shutdown. Current information suggests the shutdown may last all week or even longer. The response to this issue is hard to predict. At first you may notice the lack of government reports. Secondly, if demand for higher risk assets declines then look for money to flow into the lower-risk Japanese Yen and gold markets. These markets will be perceived as safe havens.

As far as economic news is concerned, the week begins with the Bank of Japan’s monetary policy statement, BOJ Outlook Report and BOJ Press Conference. Traders will be looking for information on whether central bank officials are considering lifting financial stimulus. The USD/JPY could weaken if the BOJ delivers a hawkish message.

In the U.S., the major reports are Advance GDP and Durable Goods on Friday. Next week, the Federal Reserve meets to discuss monetary policy.