USD/JPY Fundamental Weekly Forecast – Focus Remains on Stock Market Volatility, Safe-Haven Demand

Last week, the Dollar/Yen plunged sharply lower as investors made major adjustments to their portfolios due to an unexpected shift in Fed policy and safe-haven demand fueled by a steep drop in U.S. equity markets.

For the week, the USD/JPY settled at 111.205, down 2.189 or -1.93%.

U.S. Federal Reserve Impact

After a steady opening last week, the Dollar/Yen plummeted after the U.S. Federal Reserve raised its benchmark interest rate 25 basis point in a widely expected move. What spooked the markets, however, was the news that the central bank now forecasts two hikes next year, down from three rate hikes previously projected. Traders had priced in as many as 1 or fewer rate hikes in 2019.

Furthermore, the Fed also said it would continue to include in its monetary policy statement that further “gradual” rate hikes would be appropriate. Federal Reserve Chairman Jerome Powell also said the balance sheet reduction program will continue to proceed as planned.

Stock Market Sell-off and Safe-Haven Buying

The steep plunge in U.S. equity markets also drove investors to seek shelter in the safe-haven Japanese Yen last week. The biggest drop occurred on Thursday, December 20 when the USD/JPY fell to its lowest level since September 7 as Treasury yields plummeted and stocks fell sharply.

U.S. Government Shutdown

The U.S. government shutdown on Saturday. However, it’s not expected to have too much influence on the market unless it remains shutdown beyond January 4.

Bank of Japan Monetary Policy Decision

The Bank of Japan maintained its ultra-loose monetary policy on December 20 and reaffirmed its view the economy is on a solid footing, even as fears of slowing global growth jolt markets and lowered prospects for hitting its 2 percent inflation target.

Forecast

The USD/JPY could be rangebound early in the week due to bank holidays on Monday and Tuesday. The U.S. markets are closed only on Tuesday. Nonetheless, if you choose to trade then be prepared for well-below average volume and exaggerated moves in either direction.

Later in the week, the U.S. will release its Conference Board Consumer Confidence report. It is expected to come in at 133.0, lower than the previously reported 135.7.

Due to the bank holidays this week and the next week, economic data may not have much of an influence on the price action until January 4^th’s U.S. Non-Farm Payrolls report.

Stock market volatility and the government shutdown are likely to grab most of the headlines this week. Additionally, investors will get the opportunity to react to remarks from Bank of Japan Governor Kuroda on Thursday as well as a slew of minor economic reports including housing starts, unemployment rate, BOJ Summary of Opinions, Preliminary Industrial Production and Retail Sales.