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USD/JPY Fundamental Weekly Forecast – BOJ Expected to Leave Policy Unchanged

The Bank of Japan will issue its Outlook Report and Monetary Policy on Tuesday. It is expected to leave interest rates and policy unchanged. Also expect policymakers to say they are optimistic about a recovery in the economy because of the signing of the U.S.-China trade deal.
James Hyerczyk

The Japanese Yen hit a multi-month low last week, fueled by increased demand for higher-yielding assets, which made the safe-haven currency a less-desirable investment. Better-than-expected U.S. economic data also drive U.S. interest rates higher, widening the spread between U.S. Government bond and Japanese Government bond yields.

The Bank of Japan was in the news last week ahead of this week’s BOJ interest rate and policy decisions

The Bank of Japan cut its economic assessment for three of the country’s nine regions on Wednesday but remained cautiously optimistic that domestic demand could help offset a slowdown in exports and manufacturing.

Also on Wednesday, Governor Haruhiko Kuroda held to the BOJ’s view that the Japanese economy will see moderate growth despite weak exports and output, hit by the global slowdown and natural disasters at home.

On Thursday, Reuters reported the Bank of Japan is expected to keep monetary policy steady this week and nudge up its economic growth forecast, as the U.S.-China trade deal and de-escalation in Middle East tensions take some pressure off the central bank for more stimulus.

Last week, the USD/JPY settled at 110.170, up 0.663 or +0.61%.

Better US Data Drives Demand for Dollar

Consumer prices rose slightly less than expected in December and monthly underlying inflation pressures retreated, which could allow the Federal Reserve to keep interest rates unchanged throughout this year.

The U.S. Labor Department also reported its producer price index for final demand ticked up 0.1% last month after being unchanged in November.

Weekly jobless claims unexpectedly dropped by 10,000 to 204,000. Economists polled by Reuters expected a print of 216,000. Meanwhile, retail sales climbed by 0.3% in December, matching expectations. The Philadelphia Federal Reserve business index also jumped to 17 in January from 2.4 in December.

Finally, U.S. housing starts soared nearly 17% in December to a 13-year high, according to a Friday release from the Census Bureau.

Weekly Forecast

Major U.S. economic releases will be scarce this week. Nonetheless, traders will continue to focus on the direction of U.S. Treasury yields and demand for risky assets will continue to drive most of the price action.

The Bank of Japan will issue its Outlook Report and Monetary Policy on Tuesday. It is expected to leave interest rates and policy unchanged. Also expect policymakers to say they are optimistic about a recovery in the economy because of the signing of the U.S.-China trade deal. Furthermore, expect them to say that they stand ready to provide more stimulus if necessary.

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