USD/JPY Fundamental Weekly Forecast – Increased Demand for Risky Assets Could Turn Dollar/Yen Around

The Dollar/Yen rally started to sputter early in the week, even before the Fed’s interest rate decision and monetary policy statement. It reached its highest level at 113.745 on November 14 the day before the Fed news.

For the week, the USD/JPY settled at 112.585, down 0.874 or -0.77%.

The Fed delivered a “dovish” outlook on inflation and the direction of interest rates. The U.S. central bank kept its interest rate projections steady rather than revising them higher.

The Fed raised its benchmark rate by a quarter point to a range of 1.25-1.50 percent on Wednesday. The central bank projected three more rate hikes in both 2018 and 2019, unchanged from its September forecasts.

The central bank also hiked its GDP estimate from 2.1 percent in September to 2.5 percent. The Federal Open Market Committee also adjusted its inflation forecast for 2018 to 1.7 percent from 1.6 percent.

In other news, U.S. producer price data showed an increase in wholesale inflation, increasing hopes that price pressures may be rising from sluggish levels. According to the Labor Department, the producer price index for final demand increased 0.4 percent last month. The number met economist expectations.

Core PPI was up 0.3%, beating the 0.2% forecast, but coming in lower than the previous month’s 0.4% read.

The Labor Department said on Wednesday its Consumer Price Index increased 0.4 percent last month after edging up 0.1 percent in October. That raised the year-on-year increase in the CPI back to 2.2 percent from 2.0 percent in October. The increase was in line with economists’ forecasts.

Core CPI advanced 0.2 percent in October. As a result, the annual increase in the core CPI slowed to 1.7 percent in November from 1.8 percent in October.

U.S. retail sales increased more than expected in November, helped by a brisk start to the holiday shopping season. Investors read this as a sign of sustained strength in the economy.

The Commerce Department said on Thursday that retail sales rose 0.8 percent last month. Data for October was revised to show sales gaining 0.5 percent instead of the previously reported 0.2 percent rise. Economists were looking for an increase of 0.3 percent in November.

Forecast

This week, investors will get the opportunity to react to U.S. data on Building Permits, Final GDP and Core Durable Goods Orders.

The Bank of Japan will also release its monetary policy statement. It is widely expected to leave its benchmark interest rate at -0.10%. The BOJ will also hold a press conference at which it may discuss future policy moves in the wake of improving economic conditions.

The price action will be controlled by the usual factors, Treasury yields, the U.S. Dollar and demand for higher risk assets. Traders will also be focused on the passing of the tax reform bill. However, this news may already be priced into the market.

The USD/JPY was under pressure last week due to the tightening of the interest rate differential between U.S. Government Bonds and Japanese Government Bonds. This is likely to continue as long as Treasury yields continue to weaken.

Once the move in the Treasury yields is over, USD/JPY will turn their focus to demand for higher-yielding assets. If U.S. stocks continue to rise then the Dollar/Yen may resume its uptrend.

The main trend is down according to the weekly swing chart. A trade through 114.728 will change the main trend to up. A move through 110.836 will signal a resumption of the downtrend.