USD/JPY Fundamental Weekly Forecast – Price Action Indicates Fed is in Driver’s Seat

The divergence in the monetary policies of the Fed and BOJ can’t be any clearer. This is why the USD/JPY is bullish. What stands out after last week’s performance is that the Fed is ready to raise rates again in December while the BOJ is still looking at downside risks to the economy.
James Hyerczyk
Japanese Yen
Japanese Yen

The divergence between the monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan helped drive the Dollar/Yen to its highest level since December 21. The widely expected Fed rate hike last week also widened the spread between U.S. Government bond yields and Japanese Government bond yields, making the dollar a more attractive investment.

In other news, it was revealed in the Bank of Japan summary of opinions that policymakers debated in September the potential of making further tweaks to their massive stimulus program with one member seeing room to make monetary policy more flexible. Another BOJ policymaker called on the need to deepen debate within the nine-member board on the time frame for maintaining the central bank’s ultra-loose policy, the summary showed.

For the week, the USD/JPY settled at 113.685, up 1.137 or +1.01%.

Monetary Policy Divergence Continues

The Hawkish Fed

The U.S. Federal Reserve increased the target for the bank’s benchmark by 0.25%, to a range of 2%-2.25%. A majority of Federal Open Market Committee members also said they expect another rise before the end of the year. This was also the bank’s eighth rate hike since 2015, continuing its policy of gradual rate hikes.

FOMC members led by Chairman Jerome Powell said the economy is strong enough that aggressive stimulus is no longer necessary. This confidence was shown by the Fed ending its description of its policy as “accommodative”.

Powell also said the rate hike reflected the Fed’s confidence in the U.S. economy, describing it as a “particularly bright moment”.

Fed officials now expect the U.S. economy to grow by 3.1% this year, faster than the 2.8% forecast in March, according to the projections released after the meeting. Their predictions for inflation remained unchanged at around 2%.

The FOMC forecasts showed Fed officials expect about three rate hikes in 2019 and one more in 2020, which would lift the central bank’s important Fed funds rate to about 3.4% that year.

The Dovish BOJ

By contrast as revealed in Friday’s Bank of Japan Summary of Opinions, policy board members of the BOJ are becoming increasing concerned about downside risks to the economy and prices, including the potential impact of trade frictions.

“With regard to the risk balance in the global economy, there likely remain growing downside risks stemming from trade friction between such economies as the United States and China as well as from fluctuations in financial markets,” one of the BOJ’s nine policy board members said, according to the summary of the board’s meeting held on September 18-19.

The BOJ stood pat on policy at the September meeting after making a number of tweaks in July to prepare for a longer-than-expected fight to lift inflation, which has yet to reach the bank’s 2% target. It also reiterated that the bank will allow the 10-year Japanese government bond yield to move in a wider range in a bid to revive JGB trading.

Forecast

The divergence in the monetary policies of the Fed and BOJ can’t be any clearer. This is why the USD/JPY is bullish. What stands out after last week’s performance is that the Fed is ready to raise rates again in December while the BOJ is still looking at downside risks to the economy.

There is economic data from Japan this week, but if the BOJ is still concerned about the strength of the economy then I don’t think investors are going to put much faith in the numbers. This likely means we’ll see a muted reaction to the reports.

Early Monday, the Tankan Large Manufacturers Index is expected to come in at 22, up slightly from 21. The next report is Consumer Confidence. It is forecast at 43.4, up slightly from 43.3. Call me when it gets over 50. The rest of the week is peppered with minor reports on household spending, foreign exchange reserves and average cash earnings. Medium reports include leading economic index and coincident index.

The chart pattern indicates the market is being driven by strong technical momentum. It seems the higher the market goes, the faster it moves. After trading in an elongated range for close to a year, investors seem to finally be taking the Fed seriously as it moves more aggressively to reduce its balance sheet.

The weekly chart indicates that a move over 113.745 this week could attract enough buyers to drive the USD/JPY to at least 114.728.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US