USD/JPY Fundamental Weekly Forecast – Treasury Yields Still Main Price Driver

The Dollar/Yen closed at its lowest level since the week-ending April 13, 2018. Expectations of a sooner-than-expected rate cut by the U.S. Federal Reserve drove most of the price action. Safe-haven buying due to concerns over rising tensions between the United States and Iran also contributed to the selling pressure.

Last week, the USD/JPY settled at 107.310, down 1.253 or -1.15%.

In in its latest monetary policy statement, Fed policymakers didn’t say specifically it would cut rates this year, however, it did make a few changes to the language in the statement to strongly suggest a rate cut was coming. Furthermore, the “dot plot” forecasts and comments from Fed Chair Jerome Powell also leaned toward the dovish side. This was enough to drive the benchmark 10-year U.S. Treasury yield under 2-percent and leading investors to place the chances of a late July rate cut at 100%. In other news, the Bank of Japan left policy unchanged, but leaned toward more stimulus if necessary.

U.S. Federal Reserve

As far as the highlights of the Fed’s interest rate decision, monetary policy statement and economic projections are concerned:  The Federal Open Market Committee (FOMC) voted 9 to 1 to keep the benchmark rate in a target range of 2.25% to 2.50%. The Fed dropped the word “patient” in describing its approach to policy. Central bankers also left the door open somewhat to future cuts. Finally, eight members favored one cut in 2019, while the same number voted in favor of the status quo, while one wanted a rate hike. Powell did say during a post-meeting press conference that some officials believe the case for accommodation had “strengthened.”

Bank of Japan

The Bank of Japan kept monetary policy in check on Thursday, holding interest rates at ultra-low levels while saying it preferred to save its weapons at this time rather than introduce additional stimulus. The BOJ also stressed that global risks were increasing as trade tensions and uncertainty over U.S. economic policies shock financial markets, signaling that it, too, is leaning toward ratcheting up, not reducing, monetary support.

Weekly Forecast

Even with U.S. investors pricing in a 100-percent chance of a rate cut at the Fed’s next meeting on July 31, the direction of the USD/JPY is likely to continue to be determined by trader reaction to Treasury yields. If yields firm, the Forex pair is likely to rally on short-covering and profit-taking. Weaker yields will put renewed pressure on the USD/JPY.

The Fed is going to remain data dependent ahead of its July interest rate decision so we could see a reaction to this week’s major reports including the Conference Board’s Consumer Confidence and U.S. Final GDP.

Fed Chair Jerome Powell is also scheduled to speak on Tuesday afternoon. Traders will be looking to react to any comments about monetary policy, the strength of the economy and the timing of potential rate cuts.