USD/JPY Fundamental Weekly Forecast – Bullish Traders Hoping Fed Announces Early End to Tapering

The Dollar/Yen closed higher with the move primarily driven by a sharp rise in U.S. Treasury yields early in the week. After that the Forex pair became rangebound, giving back some of those gains into Friday’s consumer inflation report and ahead this week’s U.S. Federal Reserve monetary policy decisions.

Last week, the USD/JPY settled at 113.392, up 0.555 or +0.49%. For the week,  Invesco CurrencyShares Japanese Yen Trust (FXY) finished at $82.75, down $0.54 or -0.65%.

Weekly Recap:  Treasury Yields Climb Ahead of Inflation Data, Fed Meeting

U.S. Treasury yields rose early last week, making the USD/JPY a more attractive investment, as risk sentiment increased with investors monitoring the omicron COVID-19 variant and the Federal Reserve’s potential policy tightening.

Market expectations have grown for the Fed to zero in on combating inflation, following increasingly hawkish comments from policymakers. Meanwhile the omicron variant continued to spread according to healthcare officials with no real indication of its potential impact on the economy at this time.

Focus Now Shifts to Federal Reserve Policy Announcements

Perhaps underpinning the USD/JPY is speculation that a major shift is underway at the Federal Reserve to begin to remove the central bank’s massive pandemic easing policies, and could see it hike rates sooner than is priced in by markets.

Recent comments by Fed officials suggest the central bank is likely to decide to double the pace of its taper to $30 billion a month at its December meeting next week. Initial discussions could also begin as soon as the December meeting about when to raise interest rates and by how much next year with Fed officials set to submit a fresh round of economic forecasts and projections for the Fed Funds rate.

There is no consensus yet on when to begin hikes, but it’s clear that the faster taper is designed to give the Fed flexibility to raise rates as soon as the spring. The markets do not appear to expect the first rate hike until the summer.

Weekly Forecast

Ahead of Wednesday’s Federal Reserve monetary policy decision, investors are hawkish, which is supportive for the USD/JPY. Whether it continues to climb is still a guess because so much of the Fed’s decision has already been priced into the Forex pair. It could easily turn into a buy the rumor, sell the fact situation.

At what is the fact? Ahead of the Fed, we already know that Chairman Jerome Powell in testimony before Congress supported the idea of a faster taper and made a dramatic shift when he said the big concern with another wave of the coronavirus or new variant was inflation, because it might keep people out of work and worsen supply constraints.

What should traders be looking for?  Ahead of the Fed decisions, the market is pricing in a June rate hike. That is primarily based on what investors know at this time.

The USD/JPY could spike higher if the Fed says anything to suggest the timetable of the first rate hike should be moved up to perhaps April. The tip-off will be comments that suggest the Fed aims to complete its asset purchases by the end of the first quarter.

Furthermore, bullish investors should be looking for any language that suggests the Fed will go “live” in the future. This would put it in a position to raise rates several times next year.