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USD/JPY Fundamental Weekly Forecast – COVID-Driven Risk Sentiment Sets the Tone

By:
James Hyerczyk
Published: Jul 20, 2020, 03:39 UTC

Risk sentiment will drive the price action. Weak equity markets, for example, could increase the U.S. Dollar’s appeal as a safe-haven investment.

USD/JPY

The Dollar/Yen eked out a small gain last week as investors reacted at times to the ever-changing risk sentiment or the volatile “risk on”, “risk off” scenarios. Not only were investors being influenced by demand for risky assets, but also the direction of U.S. interest rates.

The catalysts behind the choppy price action were simmering U.S.-China trade relations, surging U.S. and global coronavirus infections rates, economic reports and expectations of new fiscal and monetary stimulus packages.

Last week, the USD/JPY settled at 107.026, up 0.109 or +0.10%.

The highlight out of Japan last week was the Bank of Japan’s monetary policy decision and outlook report. In the U.S., it was Retail Sales.

The Bank of Japan signaled confidence the economy will emerge from the coronavirus pandemic’s devastating blow and ruled out the risk of deflation, suggesting a pause in monetary easing after it delivered stimulus twice so far this year.

But Governor Haruhiko Kuroda warned the outlook was highly uncertain and stressed the BOJ’s readiness to loosen policy settings again if risks, such as a resurgence in infections, derails the fragile recovery.

“We expect the economy to recover gradually and steadily,” Kuroda told reporters last Wednesday.

“If further steps are needed, we of course won’t hesitate to take additional easing steps. Options include an expansion in our lending facilities, as well as cuts in our short- and long-term interest rate targets.”

Kuroda’s remarks came after the BOJ maintained its short-term rate target at -0.1% and a pledge to cap 10-year government bond yields around zero, as widely expected.

In the U.S., retail sales saw an uptick in June. But a resurgence of COVID-19 infections and high unemployment are threatening developing economic growth.

The Commerce Department announced on Thursday that retail sales saw an increase of 7.5 percent last month. In May, sales were up 18.2 percent, the biggest gain since 1992, according to the department’s website.

Weekly Forecast

Risk sentiment is going to continue to drive the price action. Weak equity markets, for example, could increase the U.S. Dollar’s appeal as a safe-haven investment despite lower Treasury yields.

On the data front, the data is limited from Japan because of a two-day bank holiday late in the week. Early in the week, however, investors will have the opportunity to react to Japan’s Trade Balance report. It is expected to come in at 0.33T. Of major importance will be exports to the United States.

National Core CPI is expected to rise slightly to -0.1% from -0.2%. Flash Manufacturing PMI will also be reported.

There are no major reports due in the U.S. However, traders are likely to continue to focus on Weekly Unemployment Claims, Flash Manufacturing PMI and Flash Services PMI.

Traders will also be watching for any news regarding new coronavirus-related lockdowns and restrictions in the United States. Traders will also be looking for new developments regarding fresh fiscal stimulus as the U.S. Congress reconvenes on Monday.

The Fed is expected to be quiet, but can always surprise.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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