USD/JPY Fundamental Weekly Forecast – No Fed Cut in June; Traders Want to Know About July

The U.S. Federal Reserve is expected to leave its benchmark interest rate unchanged at 2.50%, but could issue a dovish monetary policy, which hints at a rate cut in July. Investors will be looking for clues for an easing of monetary policy later this year.
James Hyerczyk

The Dollar/Yen closed higher last week with most of the gains attributed to the strong rally on Friday. The Forex pair moved higher early in the week as investors shrugged off the weaker-than-expected U.S. Non-Farm Payrolls report from June 8. Then retreated at mid-week after weaker-than-expected U.S. consumer inflation data raised the chances of a Federal Reserve interest rate cut on June 19. The Dollar/Yen rebounded on Friday to post a higher close for the week after a stronger-than-expected U.S. retail sales report indicated the U.S. economy may not be a weak as investors thought.

Last week, the USD/JPY settled at 108.563, up 0.360 or +0.33%.

There were no major reports released by Japan last week with most of the price action driven by the direction of U.S. Treasury yields and demand for risky assets.

On the positive side in Japan, Bank Lending rose 2.6%, higher than expected. The Current Account came in at 1.60 Trillion, up from 1.27 Trillion and better than the 1.44 Trillion forecast. M2 Money Stock rose 2.7%. Core Machinery Orders were up 5.2%, well above the -0.8% forecast. Tertiary Industry Activity rose 0.8%, better than the 0.4% forecast

On the negative side in Japan, Final GDP Price Index was 0.1%, below the 0.2% forecast. Economy Watchers Sentiment was 44.1, missing the 45.5 estimate and BSI Manufacturing Index came in at -10.4. Traders were looking for a reading of 4.5.

In the U.S., Core PPI was steady, but Core CPI was lower than expected at 0.1% versus 0.2%. Weekly Unemployment Claims rose to 222K, above the 215K forecast. Core Retail Sales were 0.5%, meeting the estimate. The previous month was revised higher to 0.5%. Retail Sales rose 0.5%, lower than the 0.7% forecast. However, the previous month was revised higher to 0.3%. Industrial Production also came in higher than expected at 0.4%.

Weekly Forecast

Central bank activity will dominate the Dollar/Yen trade this week with the U.S. Federal Reserve set to release its interest rate decision, monetary policy decision, and economic projections on Wednesday, and the Bank of Japan set to release its monetary policy statement on Thursday.

The U.S. Federal Reserve is expected to leave its benchmark interest rate unchanged at 2.50%, but could issue a dovish monetary policy statement, which hints at a rate cut in July. Investors will be looking for clues for an easing of monetary policy later this year. Traders are now pricing in a more than 80% chance of a rate cut in July and 70% probability of another reduction in September, according to the CME Group’s Fed Watch tool.

Last week’s price action suggests June’s Fed policy statement may have already been priced into the USD/JPY. July’s rate cut is also being priced in. We could see a muted reaction to the Fed decision by Dollar/Yen traders.

The Bank of Japan is expected to leave its benchmark rate unchanged, but may discuss the need for additional stimulus.

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