USD/JPY Fundamental Weekly Forecast – Fed Expected to Raise Rates, BOJ to Leave Benchmark Rate Unchanged

The Dollar/Yen finished higher last with support coming from increased demand for risky assets and expectations of a Fed rate hike this week. The Forex pair did give up some of its gains late in the week as investors flocked into the safe-haven Japanese Yen.

Last week’s price action was primarily driven by news from China. Positive developments from the U.S.-China trade negotiations helped drive up U.S. equity markets which supported the U.S. Dollar. Bad economic numbers from China encouraged investors to shed risky assets, making the Yen a more-desirable investment.

Last week, the USD/JPY settled at 113.394, up 0.687 or +0.61%.

Global equity markets traded higher early in the week on optimism that U.S. and China negotiations would soon resolve the trade dispute issues between the world’s two largest economies. Driving this train of thought was a pair of olive branches from China and upbeat comments from President Trump.

Firstly, China resumed buying U.S. soybeans as China’s President Xi made good on his recent pledge. Secondly, China said it would temporarily reduce tariffs on imports of American-made cars.

This optimism came crashing down on Friday following the release of disappointing data from China. The selling began in Asia early Friday after China reported industrial production and retail sales growth numbers for November which failed to meet expectations.

In Japan, a key quarterly economic survey by the Bank of Japan showed sentiment among large manufacturers remained unchanged between November and December, even as worries about global trade tensions persisted.

The Tankan survey, released on Friday, said sentiment remained flat at 19 for a second time after three quarters of decline.

Forecast

This week, USD/JPY investors will get the opportunity to react to interest rate and monetary policy decisions by the U.S. Federal Reserve and the Bank of Japan. Also in the U.S., the government will release the latest figures on durable goods and gross domestic product. The Japanese government is also scheduled to release its latest figures on inflation.

U.S. Federal Reserve

The Fed is widely expected to raise its benchmark interest rate 25 basis points. However, investors will be more interested in how the Fed views future rate hikes.

Fed Chair Powell will also hold a press conference. He is expected to soften his tone about the economy, which will be interpreted as him being dovish. His job is to calm the markets enough to potentially jump start another leg up in the stock market.

Dollar/Yen traders should focus on the stock market after Powell speaks. His remarks can trigger a huge rally, or a steep plunge. If stocks rally, the USD/JPY should rise. If stocks break sharply then look for the Japanese Yen to rise on safe-haven buying.

Bank of Japan

Investors aren’t expecting anything new from the Bank of Japan (BOJ). Look for policymakers to leave its benchmark rate unchanged at -0.1%. Japan is also scheduled to release its latest inflation data. The year-on-year rate of inflation of 1.4% hit in November is expected to remain unchanged. This will confirm the central bank’s assessment that despite years of monetary easing, it has not been able to reach its price stability target at 2%.