USD/JPY Fundamental Weekly Forecast – Traders Eyeing Powell Speech, Fed Minutes for Clues About Tapering

The Dollar/Yen closed lower last week as mixed U.S. economic data raised doubts over the timing of the Fed’s plan to begin tapering its asset buying program.

The Forex pair rose early in the week on the back of stronger-than-expected U.S. labor market data released on August 6. Traders used this data to price in an earlier-than-expected tapering of the Fed’s bond and mortgage purchasing program.

Last week, the USD/JPY settled at 109.603, down 0.623 or -0.57%. This was down from a one-month high of 110.698.

Trading conditions turned choppy on Wednesday and Thursday when the U.S. government first reported weaker-than-expected consumer inflation then followed it up with stronger-than-expected producer inflation.

The week ended on a weak note on Friday when the University of Michigan Consumer Sentiment report fell to its lowest level since 2011 as traders expressed doubt in the strength of the economy and the chance the Fed would announce its tapering plans at Jackson Hole, Wyoming at the end of August, or the next Fed meeting on September 21-22.

Essentially, it was weaker U.S. Treasury yields that drove the USD/JPY lower. The drop in yields tightened the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive asset.

Weekly Outlook

This week investor focus will remain on U.S. economic reports and Fed speakers. Traders will be looking for clues as to if and when the central bank will begin tapering.

The major events out of the U.S. are Tuesday’s retail sales report and Federal Reserve Chairman Jerome Powell’s speech. On Wednesday, the Fed will release the minutes from its July monetary policy meeting.

Minor reports include the Empire State Manufacturing Index, Industrial Production, Capacity Utilization, Building Permits, Housing Starts, the Philly Fed Manufacturing Index and weekly unemployment claims.

In Japan, we could see a small reaction to reports on GDP, Industrial Production, Tertiary Industry Activity, Core Machinery Orders, Trade Balance and National Core CPI.

The most import influence on the direction of the USD/JPY will be the direction of the 10-year U.S. Treasury yield. On Friday, the yield dropped below 1.3%. Continued weakness this week will drag the USD/JPY lower.