USD/JPY Fundamental Weekly Forecast – Price Action Will Be Dictated by U.S. Consumer Inflation Data

The Dollar/Yen finished higher last week helped by robust U.S. job growth which recorded its best performance in over 1-1/2 years in February

The USD/JPY settled the week at 106.803, up 1.092 or +1.03%.

The Japanese Yen was also pressured after the Bank of Japan stuck to is dovish policy stance. BOJ Governor Haruhiko Kuroda, while sounding optimistic on growth, stressed there would be no plan to change monetary policy before its 2 percent inflation target is reached.

On Friday, the U.S. Labor Department said non-farm payrolls grew by 313,000 last month, the largest monthly increase since July 2016, but average hourly earnings rose only 0.1 percent, slower than the 0.3 percent increase in January and less than the 0.2 percent forecast by analysts.

Wage gains slowed more than expected, supporting the view the Federal Reserve would not quicken its pace on raising interest rates. This may have helped limit the USD/JPY gains.

The yen also weakened as traders scaled back their safe-haven holdings of the Japanese currency on news that President Trump was prepared to meet with North Korea’s Kim Jong Un, marking a potential major breakthrough in nuclear tensions in Pyongyang and easing geopolitical tensions.

Forecast

While the jobs report may have been good news about the economy, some feel that wages weren’t strong enough to warrant any major changes from the Fed. This likely means that most traders still believe the Fed will stay the course with a forecast for three rate hikes.

At the end of the day, traders likely concluded a tightening labor market would buttress the case for the Fed to raise borrowing costs later this month and possibly two more times later this year, but the pullback in wage gains will likely prevent policymakers from raising rates four time in 2018.

Most investors will be focused on U.S. Consumer Inflation data, Retail Sales and Building Permits due to be released later in the week.

U.S. Consumer Inflation will be a closely watched report because it will likely influence next week’s Federal Open Market Committee Economic projections. Traders are looking for CPI to come in at 0.2%, down from the previously reported 0.5%. Core CPI is also expected to come in at 0.2%, down slightly from 0.3%.

U.S. Producer Inflation is expected to rise slightly by 0.1%, down from the previously reported 0.4%.

U.S. Retail Sales are expected to make a recovery from last month’s disappointing -0.3% performance with a reading of 0.3%.

Finally, Building Permits are expected to come in at 1.33M, down from 1.38M. Rising mortgage rates may weigh on this report.

With Average Hourly Earnings coming in lower than expected in last week’s Non-Farm Payrolls report for February, traders will be glued to the CPI number. A weak performance will likely mean the Fed will only raise rates a total of three times in 2018, instead of the four that some traders have been counting on.

The USD/JPY will likely tumble if the CPI number comes in lower than expected. Most of the selling will be in the U.S. Dollar.