USD/JPY Fundamental Weekly Forecast – Powell Speech, Fed Minutes Key Market Drivers This Week

The Dollar/Yen put in a mixed performance last week before closing higher. The price action was a little skewed last week due to thin trading conditions because of bank holidays in the United States and Japan.

The Forex pair started the week under pressure as investors continued to react to relatively flat U.S. consumer inflation data from November 14 and somewhat dovish comments from a couple of Fed officials about the pace of future rate hikes.

The Dollar/Yen also tracked U.S. Treasury yields nearly tick for tick last week, suggesting most of the price action was controlled by demand for safe-haven assets.

U.S. equity markets retreated all week, posting their worst Thanksgiving week performance since 2011. This may have fueled some flight to safety buying into the U.S. Dollar, leading to the higher weekly close.

Last week, the USD/JPY settled at 112.971, up 0.158 or +0.14%.

U.S. Economic Data

U.S. economic data continued to show a weakening economy, starting with the NAHB Housing Market Index which fell from a reading of 68 to 60. It also came in lower than the 67 forecast. Although a reading of over 50 indicates a favorable outlook on home sales, the plunge in the indicator serves as a warning for investors.

Housing conditions improved a little with the release of a Building Permits report which came in at 1.26 million units, matching the forecast. The previous month was revised higher to 1.17 million units. Housing Starts also matched expectations at 1.23 million units. This was higher than the previously reported 1.21 million units.

The disappointing news came on Wednesday with the release of reports on Durable Goods, Unemployment Claims and Consumer Sentiment.

Core Durable Goods Orders fell in October by 0.1%, missing the forecast of an increase of 0.4%. Durable Goods were up 0.1% versus an estimate of 0.4%.

Weekly Unemployment Claims rose unexpectedly to 224K. Traders were looking for a reading of 215K. The previous week was revised higher to 221K.

Revised University of Michigan Consumer Sentiment was 97.5, below the 98.4 estimate and 98.3 previous read.

On Friday, Flash Manufacturing PMI was also disappointing with a reading of 55.4. This was lower than the 55.8 forecast and 55.7 previous read. Flash Services PMI also missed the mark with a reading of 54.4, lower than the 55.0 forecast and 54.8 previous read.

Forecast

The direction of the USD/JPY this week is likely to be influenced by U.S. economic data, the Fed and investor appetite for risk.

Weaker than expected U.S. economic data is likely to continue to raise concerns over the pace of future rate hikes. Conference Board Consumer Confidence is expected to come in at 136.2, lower than the previously reported 137.9. Preliminary GDP is forecast to show a slight rise to 3.6%.

Fed Chair Jerome Powell is scheduled to speak on Wednesday and the Federal Open Market Committee Meeting Minutes will be released on Thursday. Traders will be looking for clues as to how the Fed feels about the weakening U.S. economy and its impact on the pace of future rate hikes.

Further weakness in the stock market could drive investors into the safe-haven Treasurys. This could make the Japanese Yen a more desirable safe-haven asset.