USD/JPY Fundamental Weekly Forecast – Hawkish Fed, Dovish BOJ Could Sink Japanese Yen

The Dollar/Yen could rise sharply after the Fed announcements if central bankers come across as hawkish, leading to the reduction in the chances of another Fed rate cut before the end of the year.
James Hyerczyk

The Dollar/Yen reached its highest level since August 1 last week as investors continued to shed the safe-haven Japanese Yen in reaction to an easing of tensions between the United States and China, an improving U.S. economy and speculation that the Bank of Japan may follow the lead of the European Central Bank and once again cut its benchmark interest rate.

Last week, the USD/JPY settled at 108.089, up 1.175 or +1.10%.

Throughout the summer, the Japanese Yen was driven higher by plunging Treasury yields as speculators increased bets on a U.S. recession due to escalating trade tensions between the United States and China. The selling was strong enough to invert the yields of the 2-year and 10-year Treasury notes, a sign used by many to forecast a future recession.

An easing of tensions between the U.S. and China following the announcement of renewed trade talks has caused investors to rethink the risk of recession. This has encouraged long bond investors to book profits, driving interest rates higher in the process. Higher U.S. rates helped widen the spread between U.S. Government bonds and Japanese Government bonds. This helped make the U.S. Dollar attractive to investors.

Weekly Forecast

The USD/JPY is currently being guided higher by rising global interest rates and stock markets. It should continue to do so this week if these two major influences continue to trend higher.

On Wednesday, investors will get the chance to react to the latest Federal Reserve interest rate and monetary policy decisions. The market has already priced in a 25-basis point rate cut. However, weeks ago, it was also pricing in a third rate cut this year in December. Since then the economy has shown improvement and U.S.-China trade relations have improved, reducing the odds for a third rate cut.

The Dollar/Yen could rise sharply after the Fed announcements if central bankers come across as hawkish, leading to the reduction in the chances of another Fed rate cut before the end of the year.

Traders will also be watching the Bank of Japan’s decisions. The BOJ could cut rates but it doesn’t have much room to do so.

In late July, the BOJ held off on expanding stimulus, but committed to doing so “without hesitation” if a global slowdown jeopardizes the country’s economic recovery.

BOJ Governor Haruhiko Kuroda said the central bank strengthened its commitment to act pre-emptively against risks to the economy, as protectionist policies and trade tensions were delaying an expected rebound in global growth.

“I don’t think Japan has lost momentum to hit the BOJ’s price goal, or that there is an imminent risk of this happening,” Kuroda told a news conference.

“But overseas are heightening. If this is prolonged, that could increase risks for Japan and threaten the economy’s momentum to hit our price goal. If this happens, we will ease policy without hesitation.”

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