USD/JPY Fundamental Weekly Forecast – Stronger as Odds of BOJ Rate Cut Rise, Fed Rate Cut Chances Drop

The Dollar/Yen closed lower last week as stronger-than-expected U.S. economic data dampened the chances of a Fed rate cut in October, making the U.S. Dollar a more attractive asset. Optimism over U.S.-China trade relations also helped reduce the Japanese Yen’s appeal as a safe-haven asset after both economic powerhouses said trade talks would resume in Washington on October 10-11. Traders showed little reaction to the impeachment inquiry on President Trump.

Last week, the USD/JPY settled at 107.938, up 0.377 or +0.35%.

The USD/JPY was driven to its lowest level since September 9 early last week as calls for impeachment proceeding against U.S. President Donald Trump drove down demand for risky assets. The Dollar/Yen also weakened following the release of disappointing consumer confidence data.

Traders flip-flopped their earlier reaction at mid-week on political uncertainties in the United States stemming from an impeachment inquiry into President Donald Trump. Now investors were looking at the dollar as the “go to” safe-haven asset, limiting the yen’s appeal. Trump helped drive the Dollar/Yen even higher after he said a trade deal with China could happen sooner than expected.

Late in the week, the USD/JPY was supported by the notion that maybe the economy doesn’t need as much ongoing stimulus.

On September 25, Dallas Fed President Robert Kaplan said even though the world economy was going through a “fragile” period, odds of a U.S. recession over the next year remain “relatively.”

On September 26, Fed Vice Chair Richard Clarida said U.S. inflation expectations are currently in line with the central bank’s 2% goal, an indication that he does not see a pressing need for new rate cuts to boost inflation.

BOJ Hints at Rate Cut

Last week, Japan’s central bank governor signaled readiness to ease monetary policy further, vowing to guide policy appropriately “without any preset conditions in mind”.

Speaking before leaders of Japan’s securities industry, Haruhiko Kuroda also warned against heightening risks from the global economy but dropped few clues on exactly what the BOJ’s next move will be when it holds its policy review on October 30-31.

Early Friday, Japan reported Tokyo Core CPI came in lower than expected at 0.5%. Analysts were looking for 0.6%. This was down from the previously reported 0.7%. This news further supports the need for additional stimulus.

Weekly Forecast

This week, Dollar/Yen investors face a slew of economic data and Fed speakers that should determine whether the central bank cuts its benchmark rate at the end of October of not. Bullish data and hawkish Fed speakers should support the USD/JPY.

The key reports to watch are ISM Manufacturing PMI. It is expected to come in at 51.0, just above the 50.0 benchmark level.

ISM Non-Manufacturing is expected to come in at 55.1, slightly below the previously reported 56.4.

On Friday, traders will get the chance to react to the September U.S. Non-Farm Payrolls report. The Non-Farm Employment Change is expected to show the economy added 140K jobs last month. This is up slightly from the previously reported 130K. Average Hourly Earnings are expected to have risen 0.3% and the Unemployment Rate is expected to hold steady at 3.7%.

There are no major reports out of Japan, but traders should pay attention to Tuesday’s Tankan Manufacturing Index and Tankan Non-Manufacturing Index.