USD/JPY Fundamental Weekly Forecast – “Risk On” Scenario Will Be Supportive

We’re not expecting too much of a reaction to Thursday’s U.S. Consumer Inflation Report (CPI) since a 25-basis point rate cut by the Fed later in the month has already been priced into the market. Traders are looking for a 0.1% increase. Core CPI is expected to have risen 0.2%.
James Hyerczyk

The Dollar/Yen posted a solid gain last week as sentiment shifted to “risk on” following a series of supportive events. These included an easing of geopolitical tensions, better-than-expected economic data from China, upbeat news over U.S.-China trade relations and positive comments from Fed Chair Jerome Powell. The shift in sentiment led to the shedding of safe-haven assets like the Japanese Yen, Swiss Franc and gold. U.S. Treasury yields also rose for the week and stocks settled in a position to challenge the all-time highs.

Last week, the USD/JPY settled at 106.914, up 0.643 or +0.61%.

U.S.-China Resume Trade Talks

The Dollar/Yen rally actually began on August 26 with the formation of a dramatic reversal bottom at 104.463. The move was triggered when President Trump said China wanted to resume trade talks. Although the press didn’t believe Trump because China failed to verify the comment at the time, his remarks proved to be true with China announcing the resumption of trade talks last week. This reduced the Japanese Yen’s appeal as a safe-haven asset.

China’s Ministry of Commerce said Thursday that the leaders of the U.S. and Chinese trade talks held a phone call in the morning and agreed to meet in early October for another round of negotiations.

Tensions Ease in Hong Kong

The Japanese Yen fell on Wednesday following reports that a controversial extradition bill is set to be withdrawn. However, this may only be a temporary reprieve from the violence that has plagued the region for months.

China Services PMI Impressive

Demand for safe-haven assets like the Yen fell and stocks soared on Wednesday after the release of a report that showed the Caixin/Markit Services Purchasing Managers’ Index came in at 52.1 in August, its highest since May. The 50-mark in PMI readings separates growth and contraction. Official data for August released over the weekend showed services sector activity picking up for the first time in five months in August.

Fed Chair Powell Optimistic

The Dollar/Yen held steady on Friday, shrugging off a mixed U.S. Non-Farm Payrolls report released earlier in the session. Helping to underpin the USD/JPY was Fed Chair Jerome Powell who said the central bank’s pivot this year to lower interest rates has helped sustain U.S. economic growth.

“The Fed has through the course of the year seen fit to lower the expected path of interest rates,” he said. “That has supported the economy. That is one of the reasons why the outlook is still a favorable one.”

Weekly Forecast

There are no major reports from Japan this week with most eyes focused on the European Central Bank’s interest rate decision on Thursday. The ECB is expected to be aggressive, which should drive up the U.S. Dollar.

Increased demand for risk is likely to continue to be the main driver of bullish price action. Rising interest rates will also be supportive for the U.S. Dollar.

We’re not expecting too much of a reaction to Thursday’s U.S. Consumer Inflation Report (CPI) since a 25-basis point rate cut by the Fed later in the month has already been priced into the market. Traders are looking for a 0.1% increase. Core CPI is expected to have risen 0.2%.

U.S. Retail Sales could generate a bigger reaction by USD/JPY traders since consumers have kept the economy afloat lately. Core Retail Sales are expected to have risen 0.1% and Retail Sales by 0.2%.

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