USD/JPY Fundamental Weekly Forecast – Tough Talk from Powell Will Dampen Safe-Haven Demand

Powell will essentially have to talk tough in an effort to calm the financial markets. If he misses then he may actually trigger more volatility in the stock markets that could send investors back into the Japanese Yen for safety.
James Hyerczyk
Japanese Yen

The dollar/yen closed higher last week, posting a technical closing price reversal bottom, which could be a sign that the worst of the selling is over. Driving the bearish price action early in the week was fear of a U.S. recession. The Forex pair rebounded late in the week as those fears eased on the back of stronger-than-expected U.S. economic data.

Last week, the USD/JPY settled at 106.323, up 0.633 or +0.60%.

Recession fears drove the Japanese Yen higher early in the week after the U.S. Treasury markets flashed troubling signals about the U.S. economy. The fears were triggered when the yield on the benchmark 10-year Treasury note briefly broke below the two year rate, “an odd bond market phenomenon that has been a reliable indicator of economic recessions,” according to CNBC.

Traders began to sell the Japanese Yen late in the week as Treasury yields firmed, stocks rose and the U.S. Dollar strengthened as stronger-than-expected U.S. economic data eased fears that the U.S. economy could be headed for a recession.

The key news boosting the U.S. Dollar and pressuring the Japanese Yen was the stronger-than-expected U.S. July Retail Sales report. It helped dampen financial markets’ fears that the U.S. economy was heading into recession.

In Japan, the Producer Price Index came in lower than expected. Tertiary Industry Activity and Preliminary Machine Tool Orders also failed to meet expectations. Core Machinery Orders and Revised Industrial Production performed better than expected.

In the U.S., the major reports all came in better-than-expected, including the Consumer Price Index, the Philadelphia Fed Manufacturing Index and the aforementioned Retail Sales.

Unemployment Claims, Capacity Utilization, Industrial Production and Consumer Sentiment disappointed. Housing data was mixed with Housing Starts falling short of expectations and Building Permits beating the forecast.

Weekly Forecast

The focus for USD/JPY traders this week will be on Treasury yields and investor demand for risk. If both continue to increase then look for investors to shed their hedge positions in the safe-haven Japanese Yen.

There are no major reports out of Japan this week, but traders will likely react to the FOMC Meeting Minutes on Wednesday, and especially to the speech by Fed Chief Jerome Powell at the Jackson Hole Symposium on Thursday.

Dollar/Yen traders are hoping that Powell says the Fed is ready to take an aggressive stance against stopping the global economic slowdown from spreading to the United States. He may even announce the possibility of an aggressive 50-basis point cut, but this may actually backfire and raise fears that conditions are actually worse than thought.

Powell will essentially have to talk tough in an effort to calm the financial markets. If he misses then he may actually trigger more volatility in the stock markets that could send investors back into the Japanese Yen for safety.

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