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James Hyerczyk
USD/JPY

The Dollar/Yen closed sharply higher last week as risk appetite returned as the announcement of an initial U.S.-China trade deal and an election victory for Britain’s Brexit-backing Conservative Party appeared to clear the fog on the global investment horizon.

The price surge drove the Dollar/Yen to 109.707, just short of the recent top at 109.728 and a major technical resistance level from May 30 at 109.930.

Last week, the USD/JPY settled at 109.354, up 0.779 or +0.72%.

The ‘Phase One’ Trade Deal

U.S. President Donald Trump and Chinese officials said Friday that they have agreed to a “phase one” trade deal that included cutting American tariffs on Chinese goods.

The two countries have reached an agreement where Washington would suspend tariffs on Chinese imports scheduled for Sunday, while Beijing would step up purchases of agricultural products.

But they offered no specific details on the amount of U.S. agricultural goods Beijing had agreed to buy, a key sticking point of the lengthy deal negotiations.

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Election Victory for Britain’s Brexit-backing Conservative Party

Demand for risky assets was also driven last week by the U.K.’s ruling Conservative Party’s commanding majority in the general election.

U.K. Prime Minister Boris Johnson’s Conservative Party won a commanding majority in the country’s general election, granting Johnson the power to drive through his Brexit deal and take the U.K. out of the EU before the January 31 deadline. The result was the party’s biggest election win since 1987.

Fed Leaves Rates Unchanged, Indicates No Changes Through 2020

Earlier in the week on Wednesday, the Federal Reserve held interest rates steady following its two-day meeting this week and indicated that no action is likely next year amid persistently low inflation.

In its statement explaining the decision, the committee indicated that monetary policy is likely to stay where it is for an unspecified time, though officials will continue to monitor conditions as they develop. The decision to keep rates unchanged was unanimous, following several dissents in recent meetings.

Additionally, through the “dot plot” of individual members’ future projections, the FOMC indicated little chance of a cut or increase in 2020.

Weekly Forecast

There was a lot of news last week with the scorecard showing the Fed decisions were bearish for the USD/JPY and the trade deal and Brexit outcomes bullish.

This week, however, the focus for Dollar/Yen traders will remain on U.S.-China trade relations. The lack of details on Beijing’s purchase of U.S. agricultural is one factor making investors nervous and this could curtail demand for risky assets. Another is the rollback of the U.S. tariffs.

The trade deal will include a rollback of some of the China tariffs and halts additional levies set to take effect on Sunday. China agreed to significant purchases of U.S. agricultural products, but the amount is below what the White House was reportedly pushing to get. On the U.S. side, investors were hoping for more than just a partial rollback of some tariffs, according to CNBC.

The U.S.-China trade drama will continue throughout 2020, said Komal Sri-Kumar, president of Sri-Kumar Global Strategies.

“There is not going to be a comprehensive trade deal before the 2020 election,” Kumar said. “What has happened so far is a face-saving way for the U.S. to show some progress on the trade talks.”

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