USD/JPY Fundamental Weekly Forecast – Direction Hinges on FOMC’s Economic Projections

The Dollar/Yen finished higher last week, but gave back most of its earlier-in-the-week gains on Friday. Increasing demand for risky assets provided most of the support as it dampened demand for the safe-haven Japanese Yen. Pressuring the Forex pair late in the week was a plunge in U.S. Treasury yields, related to soft U.S. industrial and factory data.

Last week, the USD/JPY settled at 111.469, up 0.299 or +0.27%.

Appetite for Risk Supports U.S. Dollar Early in Week

Most of the support for the USD/JPY last week was provided by a surge in U.S. equity markets. Stocks reversed the previous week’s losses last week, with the major global markets hitting a four-month high. Helping to boost demand for higher-risk assets early in the week was encouraging economic data along with little signs of accelerating consumer or producer inflation. Bullish traders felt the news was good enough for the Fed to maintain its accommodative stance.

The big three U.S. reports:  Retail Sales, Consumer Price Index and Producer Price Index offered mixed results, but the big takeaway for investors was that they were not strong enough to change Fed policy, meaning the central bank was likely to remain “patient” before raising rates.

U.S. retail sales unexpectedly rose in January, lifted by an increase in purchases of building materials and discretionary spending, but receipts in December were much weaker than initially thought. The relatively strong retail sales report will probably not change expectations for a sharp slowdown in economic growth in the first quarter.

U.S. consumer prices rose for the first time in four months in February, but the pace of the increase was modest, resulting in the smallest annual gain in nearly 2-1/2 years. Slowing domestic and global growth ae keeping inflation in check even as a tight labor market is driving up wages.

U.S. producer prices barely rose in February, resulting in the smallest annual increase in more than 1-1/2 years, yet another indication of benign inflation.

Also helping to increase appetite for risk was the Chinese government’s renewed pledge to support the economy as it slows.

BOJ Decision Has Little Effect

Late in the week, the Bank of Japan kept all policies unchanged as expected. This news had little effect on the Japanese Yen. The BOJ also offered no new projections on growth and inflation. However, the central bank did change its assessment of Japan’s economy a little. It now sees that “exports and production have been affected by the slowdown in overseas economies”.

The BOJ also continued to say that “Japan’s economy is expanding moderately” unchanged, though, which indicates that policymakers expect the global slowdown to be temporary and the recent weak Japanese export figures to bounce back once a trade agreement has been reached between the U.S. and China. Given this assessment, BOJ decided to maintain policy.

Dollar/Yen Dragged Down Late in Week

The USD/JPY plunged on Friday, producing a potentially bearish closing price reversal top. The Dollar was dragged lower by weak U.S. economic data. The catalyst for the reversal to the downside was U.S. manufacturing output which fell for a second straight month in February and factory activity in New York State was weaker than expected this month, offering further evidence of a sharp slowdown in economic growth early in the first quarter.

Weekly Forecast

This week’s key event for USD/JPY traders will be the U.S. Federal Reserve interest rate and monetary policy decisions. Furthermore, Fed policymakers will also offer new economic projections while Chairman Powell will hold a press conference. Fed officials are scheduled to meet Tuesday and Wednesday to assess the economy and deliberate on the future course of monetary policy.

Given the recent slew of weak economic data, look for the Fed to leave its benchmark interest rate unchanged. Also look for policymakers to maintain their “patient” approach. Since these conclusions are widely expected, they should have little influence on Treasury yields and thus the Dollar/Yen.

However, the Federal Open Market Committee Economic Projections are likely to move the USD/JPY. A dovish tone from policymakers will be bearish for the Dollar/Yen. If they suggest the central bank will refrain from lifting rates in 2019 then the Forex pair could break sharply.