USD/JPY Fundamental Weekly Forecast – US GDP in Focus, Light Volume Expected Ahead of US Holiday Week-End

A bullish outlook for U.S. interest rates helped widen the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive investment. The Dollar/Yen was strong all week, following a technical reversal bottom on August 21. The Forex pair was helped by the hawkish Fed minutes. However, the Japanese Yen strengthened on Friday after Fed Chair Powell hinted that policymakers were nearing the end of its monetary policy tightening cycle.

For the week, USD/JPY settled at 111.268, up 0.762 or +0.69%.

There were no major reports out of Japan last week, however, All Industries Activity fell 0.8%, Flash Manufacturing PMI came in at 52.5, close to the 52.4 estimate and National Core CPI came in slightly below expectations at 0.8%.

U.S. Dollar and Fed’s Impact on the Japanese Yen

The dollar started the week under pressure with some of the selling being driven by dovish comments from FOMC member Raphael Bostic, who said on Monday that he believes that relatively tame inflation warrants only one more rate hike in 2018. Late in the session, a comment by President Trump spiked the market lower into the close.

Trump criticized Fed policy for the second time in a month on August 20 saying, “I’m not thrilled with his (Jerome Powell) raising rates, no. I’m not thrilled.” He went on to say that “We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated,” Trump said.

The U.S. Dollar recovered on Wednesday and Thursday after the minutes of its July 31 – August 1 FOMC meeting, revealed that the central bank plans to continue its gradual pace of rate increases. It further added that Fed officials are wary of tariffs hurting the current economic recovery but are waiting to see evidence of widespread damage in economic data.

The Dollar/Yen gave back some of its gains on Friday after a key speech by U.S. Federal Reserve Chairman Jerome Powell. In his widely expected speech before a group of major central bankers at the Jackson Hole, Wyoming symposium, Powell said he anticipates a slow and steady pace of rate hikes as the central bank looks to balance economic growth and curbing lofty asset prices.

Despite Powell’s generally upbeat commentary on the state of the economy, some U.S. Dollar investors pointed out that the central bank chief seemed content with where interest rates are. This suggested that the Fed was nearing neutrality, a state where the economy needs neither a rate hike nor additional stimulus.

In economic news, the Commerce Department said on Friday Core Capital Goods Orders rose 1.4 percent last month after an upwardly revised 0.9 percent increase in June. Economists were looking for a 0.4 percent increase in July after a previously reported 0.2 percent gain in June. Core capital goods orders increased 7.2 percent on a year-on-year basis.

Forecast

Watch the volume this week. It’s expected to come in below average as the major players start to prepare for next Monday’s U.S. Labor Day holiday.

The major U.S. report is Wednesday’s Third Quarter Preliminary GDP. It is expected to come in at 4.0%, slightly below the previously reported 4.1%.

Minor U.S. reports include Conference Board Consumer Confidence, Core PCE Price Index, Personal Spending and Chicago PMI.

There are no major reports scheduled for Japan. Minor reports include BOJ Core CPI, Consumer Confidence, Retail Sales, Tokyo Core CPI, Unemployment Rate, Preliminary Industrial Production and Housing Starts.

Although U.S. GDP is called a major report, I tend to differ. In my opinion, the data is stale so I don’t expect to see much of a reaction to this number this week.

I think investors should pay more attention to the U.S. Core PCE Price Index on Thursday at 1230 GMT. This report is the Fed’s preferred inflation indicator. It is expected to come in at 0.2%, up from 0.1%. This will indicate another gradual rise in inflation.