USD/JPY Fundamental Weekly Forecast – Fear Could Drive Dollar/Yen into 101.185 Over Near-Term

The Dollar/Yen plummeted last week and closed in a position to take out a major bottom what will put it on course for the 101 to 100 area. Helping to drive the Forex pair lower was a slide in global equities and the Federal Reserve’s pledge to hold interest rates near zero until at least 2023 and keep its bond-buying program in place to stimulate the U.S. economy as part of a dovish policy stance.

Last week, the USD/JPY settled at 104.567, down 1.580 or -1.49%.

Fed Promises to Keep Rates on Hold

Longer-term U.S. Treasury yields edged higher after the Fed promised to keep rates on hold until inflation is on track to “moderately exceed” the U.S. central bank’s 2% inflation target “for some time.”

New economic projections released with the Fed’s policy statement showed rates on hold through at least 2023, with inflation never breaching 2% over the time. Policymakers saw the economy shrinking 3.7% this year, far less steep than the 6.5% decline forecast in June. Unemployment, which registered 8.4% in August, was seen falling to 7.6% by the end of the year.

BOJ Keeps Monetary Policy Steady, Sees Economy Improving Slightly

The Bank of Japan (BOJ) kept monetary policy steady last Thursday and slightly upgraded its view on the economy, suggesting that no immediate expansion of stimulus was needed to combat the coronavirus pandemic.

The BOJ maintained its -0.1% short-term interest rate target and a pledge to cap 10-year government bond yields around zero.

New PM Suga Pledges to Work with BOJ

Yoshihide Suga became Japan’s first new prime minister in nearly eight years on Wednesday, pledging to contain COVID-19 and push reforms after retaining about half of predecessor Shinzo Abe’s lineup in his cabinet.

Analysts expect no major change to the relationship between the BOJ and an administration led by Suga who, as Abe’s right-hand man, spearheaded the departing premier’s strategy to revive the economy with bold monetary and fiscal measures.

After the BOJ announcements, Governor Haruhiko Kuroda said the central bank will keep close coordination with the new government led by Suga to pull the pandemic-hit economy out of its slump. Kuroda, speaking to reporters, sought to reassure investors that the BOJ will keep easing in pursuit of its 2% inflation target and maintain its close relationship with the government after its first leadership change in almost eight years.

Weekly Forecast

Since last week’s sell-off in the USD/JPY began before the Fed’s announcement, we believe there were other factors driving the price action such as fear of a bigger correction coming in the global equity markets, a slower pace of the economic recovery and the outcome of the U.S. presidential election. Some can even build a case for political uncertainty in Japan as a tailwind for the Yen.

We see bearish speculators continuing to pile on the USD/JPY, which means they will be going after 104.189. The charts indicate there is plenty of room to the downside under this level with the March bottom at 101.185 the next major target.

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