USD/JPY Fundamental Weekly Forecast – Price Action Suggests Investors Anticipate Pace of Rate Hikes to Slow

The Dollar/Yen retreated last week, led by lower Treasury yields. The catalysts behind the move were an easing of concerns about overheating inflation and the Fed’s softening tone about economic growth. Traders were primarily reacting to the October consumer inflation report and somewhat dovish comments from Fed Chairman Jerome Powell and Fed Vice-Chairman Richard Clarida.

Last week, the USD/JPY settled at 112.813, down 0.998 or -0.88%.

U.S. Consumer Price Index (CPI)

On Wednesday, November 14, U.S. Treasury yields held steady after a report on consumer prices showed inflation rising as much as forecast on a month over month basis.

According to the U.S. Labor Department, the Consumer Price Index rose 0.3 percent last month, the biggest gain since January after edging up 0.1 percent in September. In the 12 months through October, the CPI increased 2.5 percent, picking up from September’s 2.3 percent rise.

Excluding the volatile food and energy components, the CPI climbed 0.2 percent. The so-called Core CPI had gained 0.1 percent for two straight months. In the 12 months through October, the core CPI increased 2.1 percent after advancing 2.2 percent in September.

Traders were looking for the CPI to climb 0.3 percent and the core CPI to gain 0.2 percent in October.

Fed Member Comments

Also on November 14, Federal Reserve Chairman Jerome Powell expressed confidence in U.S. economic strength, but added during a question-and-answer session that the global economy is not growing at the same pace it was last year. He described the global picture as a “gradual chipping away” at the pace of growth but said it is “not a terrible slowdown.”

On Thursday, Atlanta Fed President Raphael Bostic, in a speech delivered in Barcelona, said that the federal funds rate is “not too far” from neutral.

Friday, Federal Reserve Vice-Chair Richard Clarida drove the USD/JPY lower when he said the central back is close to the point of being “neutral” on interest rates and should predicate further increases on economic data. “Neutral” is the point where Fed policy is neither restrictive nor stimulative.

Forecast

The Dollar/Yen weakened last week because traders perceived the events as a bit dovish. The CPI report, for example, suggested inflation is not overheating and may even be close to slowing down because of the plunge in crude oil and gasoline prices. The Fed comments also suggest a softer tone may be developing at the central bank. These factors could combine to convince the Fed to slow down the pace of rate hikes in 2019.

At this time, the Fed is expected to raise rates in December and as many as three times in 2019. Powell said that every meeting will be “hot”, which means the central bank could raise rates at any meeting. However, the data and comments suggest the number of rate hikes next year could be reduce or pushed further into the future.

The news could force USD/JPY investors to adjust positions to reflect the slower pace of rate hikes, this could put pressure on the Forex pair this week.

It is a holiday shortened week so watch for lower than average volatility.