USD/JPY Fundamental Weekly Forecast – Risk-On Scenario Favors Japanese Yen

Like most major financial markets, the direction of the Dollar/Yen will be dictated by risk sentiment. Volume is expected to be light because of another holiday-shortened week with a bank holiday in the United States on Thursday and in Japan on Wednesday and Thursday.

Bank holidays tend to translate into low volume, but not necessarily volatility so traders should be aware of the possibility of a rogue trader, who takes advantage of the light trade by triggering whipsaw activity.

Last week, the USD/JPY settled at 103.500, up 0.187 or +0.18%.

Last Week’s Recap

The Japanese Yen fell to a more than one-week low on Monday in a holiday-shortened week on fears about a fast-spreading new coronavirus strain that was discovered in the U.K., prompting investors to seek safety in the U.S. Dollar.

Low liquidity, with many traders logged out for the year, exaggerated the speed and size of the dollar’s gains against the Yen, too, as stop-loss mechanisms dumped investors out of bets against the greenback.

Domestic economic data was mixed. Bank of Japan (BOJ) Core CPI fell 0.1%. Tokyo Core CPI dropped -0.9% and Retail Sales rose 0.7%, missing the estimate of 1.8%.

The Unemployment Rate rose 2.9%, better than the 3.1% forecast and Housing Starts fell 3.7%, but beat the -4.8% estimate.

Weekly Forecast

Like we wrote earlier, the direction of the USD/JPY this week will be determined by risk sentiment. Simply stated, rising demand for riskier assets will put pressure on the safe-haven U.S. Dollar, sending investors into the more attractive Japanese Yen.

A drop in demand for risk will encourage investors to seek shelter in the greenback while shedding the Japanese Yen. However, given the light volume, it’s going to take some major news to drive the Forex pair away from the minor pivot at 103.388 that is controlling the short-term direction of the Dollar/Yen.

Breaking News: The bias is likely to be to the downside this week after a news report showed President Donald Trump signed a coronavirus relief and government funding package into law.

Trump refused to approve the legislation for days after receiving it from Congress, blowing past a deadline to prevent an estimated 14 million people from temporarily losing unemployment benefits.

The news is helping to drive up demand for risky assets with U.S. equity indexes moving to within striking distance of their all-time highs. The move also puts the U.S. market to fulfill the requirements of the “Santa Claus Rally”.

If traders follow the blue print from last week then look for the most volatility and price movement on Monday then watch it taper off into New Year’s Day on Friday.

For a look at all of today’s economic events, check out our economic calendar.