USD/JPY Fundamental Weekly Forecast – Weaker Equity Markets Making Japanese Yen Attractive Safe-Haven Asset

The Dollar/Yen closed higher last week in a volatile trade that saw the Forex pair rise to nearly a three-month high before selling pressure late in the week took away almost all of those earlier gains. The Dollar/Yen spiked to the upside last Wednesday when the Federal Reserve surprised the markets by shifting policy from dovish to hawkish. But a sell-off in the global equity markets drove up safe-haven demand for the Japanese Yen into Friday’s close.

Last week, the USD/JPY settled at 110.215, up 0.528 or +0.48%. This is down from a high of 110.823.

Federal Reserve Moves Up Its Timeline for Rate Hikes on Inflation Concerns

The Federal Reserve last Wednesday considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates, CNBC reported.

As expected, the policymaking Federal Open Market Committee unanimously left its benchmark short-term borrowing rate anchored near zero. But officials indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024. The so-called dot plot of individual member expectations pointed to two hikes in 2023.

However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed Chairman Jerome Powell acknowledged that officials discussed the issue at the meeting.

Dow, S&P Post Worst Week in Months after Hawkish Fed Spooks Investors

The USD/JPY fell sharply late in the week amid a sell-off in U.S. equity markets. Despite the hawkish outlook by the Fed, the U.S. Dollar couldn’t hold on to its gains as investors flocked to the Japanese Yen for protection.

U.S. stocks ended sharply lower on Friday, with the Dow and S&P 500 posting their worst weekly performances in months, after comments from Federal Reserve official James Bullard that the U.S. central bank might raise interest rates sooner than previously expected spooked investors.

Weekly Forecast

We haven’t seen safe-haven buying for a while, which serves as a sign that the financial markets are getting back to normal. In addition to the weaker stock market driving investors into the safe-haven Japanese Yen, U.S. Treasury yields have been falling since the Fed’s announcement last Wednesday.

Yields are retreating because worried investors are buying Treasury notes and bonds. The falling yields are tightening the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive asset.