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USD/JPY Fundamental Weekly Forecast – Focus Remains on U.S. Economic Growth, Fed Rate Hikes

Investors will continue to focus on demand for risky assets and the U.S. economic data’s influence on Treasury yields and the chances of additional rate hikes from the Fed. There are no major reports from Japan this week. This means that traders will be watching the U.S. data closely. Key reports include U.S. Core Retail Sales and Retail Sales, and Building Permits. Fed Chairman Jerome Powell is also scheduled to speak before Congress on Tuesday and Wednesday.
James Hyerczyk
Japanese Yen
Japanese Yen

The Dollar/Yen put in a strong performance last week after a sluggish start. Early in the week, the Forex pair was pressured by flight-to-safety buying fueled by a drop in demand for risk after the Trump administration announced it was looking into imposing more tariffs on Chinese goods. However, this weakness was short-lived as investors shifted their focus on U.S. economic data and its influence on the Fed’s plans to raise interest rates later this year.

Last week, the USD/JPY settled at 112.349, up 1.865 or 1.69%.

Once again the divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan was highlighted last week. Support for Fed policy grew after the U.S. reported stronger-than-expected producer and consumer inflation data at a time when the BoJ is trying to figure out how to stimulate the economy enough to push inflation into its 2% target.

The carry trade also helped drive the Dollar/Yen higher. Demand for higher risk assets drove U.S. equity markets higher, putting pressure on the Yen as aggressive investors continue to borrow from Japanese banks at low-interest levels. After borrowing in Yen, investors sold the currency to buy dollars and invest in U.S. equities.

To recap the news, on Wednesday, U.S. government data showed U.S. producers prices increased more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years.

According to the U.S. Labor Department, the producer price index for final demand climbed 0.3 percent last month after rising 0.5 percent in May. That pushed the annual increase in the PPI to 3.4 percent, the largest rise since November 2011, from 3.1 percent in May.

On Thursday, consumer prices rose in June at the highest yearly rate since 2012, reflecting a U.S. economy that’s running hotter than any time since the Great Recession.

In June, the consumer price index increased 0.1%. The monthly increase in the cost of living rose to a 12-month pace of 2.9% from 2.8%, marking the highest level in more than six years, the government said. A year ago, the 12-month rate stood at just 1.6%.

Core CPI advanced 0.2% last month. The yearly increase in the core rate edged up to a more modest 2.3%, the highest benchmark in a year and a half.

The major U.S. stock indexes closed higher on Friday to cap a stellar week. Investors once again shrugged off concerns over the escalating trade dispute between the United States and China, while shifting their focus on second-quarter earnings and revenue reports.

Not everything was coming up roses for the U.S. economy, however. While the PPI and CPI data may have helped underpin the Dollar/Yen earlier in the week, Friday’s drop in consumer sentiment pushed the Forex pair lower.

According to a report from the University of Michigan, consumer sentiment hit a six-month low, but held near the average print for the prior 12 months. The move was fueled in part by rising fears surrounding a trade war between the United States and its economic partners. Consumer sentiment fell to 97.1, below an estimated 98.2.

Forecast

Investors will continue to focus on demand for risky assets and the U.S. economic data’s influence on Treasury yields and the chances of additional rate hikes from the Fed.

There are no major reports from Japan this week. This means that traders will be watching the U.S. data closely. Key reports include U.S. Core Retail Sales and Retail Sales, and Building Permits.

Fed Chairman Jerome Powell is also scheduled to speak before Congress on Tuesday and Wednesday.

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