USD/JPY Fundamental Weekly Forecast – Supported by Rising Treasury Yields, Increased Risk Appetite

The Dollar/Yen finished marginally lower last week after posting a two-sided trade. The Forex pair was driven lower during the first half of the week in anticipation of a dovish tone from the U.S. Federal Reserve on Wednesday. It reached its low for the week at 108.495 after the Fed delivered what the market expected. Also helping the Dollar/Yen rally late in the week was increased demand for risky assets on optimism over the outcome of the U.S.-China trade talks and robust U.S. labor and factor data on Friday.

Last week, the USD/JPY settled at 109.505, down 0.040 or -0.04%.

No Surprises from the U.S. Federal Reserve

The USD/JPY weakened last week shortly after the Fed left its benchmark interest rate unchanged as expected while delivering a dovish message in its monetary policy statement. Fed Chair Jerome Powell further fanned the dovish flames.

The Federal Reserve said it will be “patient” when making decisions about future monetary policy. The central bank also removed reference to “further gradual increases” to the federal funds rate in its statement, a signal Dollar/Yen traders took to mean that it may slow the pace of interest rate increases in 2019.

The Fed also left the benchmark overnight lending rate unchanged between a range of 2.25 percent and 2.5 percent at their January meeting. This move was widely expected.

Profit-Taking on US-China Trade Optimism

The USD/JPY hit its low for the week as investors sought riskier assets amid optimism the United States and China may reach a trade deal. The move was fueled by upbeat comments from President Trump. He said on Thursday he will meet with Chinese President Xi Jinping soon to try to seal a comprehensive trader deal as the top U.S. negotiator reported “substantial progress” in two days of high-level talks.

Bank of Japan Summary of Opinions

The Bank of Japan Summary of Opinions showed that policymakers decided that maintaining the status quo would be the best approach, however, not everyone agreed on the move. The summary showed one policymaker calling for the need to ramp up stimulus if risks escalate, underlining a rift in the board between those who want stronger steps to achieve the price target, and others who are worried about the rising cost of prolonged easing.

“The BOJ should stand ready to take policy action if risks to the economy and prices materialize,” the board member was quoted as saying.

“When inflation is moving further away from our target, it’s not a desirable approach to stand pat until a serious crisis occurs,” said the board member.

Additionally, Reuters quoted Bank of Japan Deputy Governor Masayoshi Amamiya as saying, “The central bank must contain the side effects of its policy to sustain massive stimulus, highlighting concerns over the pain prolonged easing is inflicting on the profits of financial institutions.”

Amamiya went on to say, “The effects of the trade tensions may spread, not only through the direct impact on trade, but through the damage on companies’ investment appetite and the market’s risk sentiment.”

Prices Supported by Robust U.S. Jobs Report, Factory Data

The USD/JPY recovered most of its losses at the end of the week, but remained lower for the week.  Prices were supported by a combination of a robust payrolls report and strong manufacturing data from the U.S.

Weekly Forecast

This week, USD/JPY investors are likely to continue to monitor the progress of U.S.-China trade talks. Positive developments should be supportive. We’re also likely to continue to see support generated by Friday’s blowout jobs report. If this news continues to drive Treasury yields higher, then look for the Dollar to become a more desirable investment.

The overall direction of the USD/JPY this week will once again be determined by Treasury yields and investor appetite for risk.

The main influence on the Dollar/Yen over the mid-term will be the dovish Fed policy. This should be enough to put a lid on prices. However, over the short-run we are going to see periodic price adjustments in reaction to U.S. economic data.

Bullish economic data will increase the chances of a rate hike so this could provide support for the USD/JPY.

This week’s major report is ISM Non-Manufacturing PMI. It is expected to come in at 57.0, slightly below the previously reported 57.6. Given Friday’s blowout ISM Manufacturing PMI data, I wouldn’t be surprised if this number beats the forecast.

Fed Chairman Jerome Powell is scheduled to speak on Wednesday night. He’s actually in a tough position because the labor market data points toward a strong economy after he told investors last Wednesday that the case for rate increases had “weakened” in recent weeks.