USD/JPY Fundamental Weekly Forecast – With Economies Reopening, Traders Will Be Watching Coronavirus Curve

The Dollar/Yen was mostly lower last week as investors turned more positive and less averse to risk amid an easing in coronavirus lockdown restrictions in several countries. Demand for the Japanese Yen increased after the Bank of Japan (BOJ) announced additional measures to support an economy battered by the virus. Meanwhile, the Fed came across as dovish in its monetary policy statement, pressuring the U.S. Dollar.

Last week, the USD/JPY settled at 106.911, down 0.582 or -0.54%.

Investors were encouraged early in the week to move money into riskier assets and out of the U.S. Dollar after the Australian states of Queensland and Western Australia said they would slightly ease social distancing rules this week as the number of people infected decreased on the continent.

Encouraged by a fall in infection rates, Germany also has allowed on Sunday small retail stores to reopen, provided they adhere to strict distancing and hygiene rules. Now large corporations are following suit. Additionally, Italy will also ease lockdown measures from May 4.

Bank of Japan

The BOJ expanded its stimulus to help companies hit by the coronavirus crisis, pledging to buy unlimited amounts of bonds to keep borrowing costs low as the government tries to spend its way out of the deepening economic pain.

The move puts the BOJ in line with other major central banks that have unleashed unprecedented amounts of monetary support as the health crisis stokes fears of a deep global recession. The central bank also sharply cut its economic forecast and projected inflation would fall well short of its 2% target for three more years, suggesting its near-term focus will be to battle the crisis.

US Federal Reserve

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals,” the central bank said in a statement at the end of a two-day policy meeting on Wednesday.

The Fed’s statement came after data on Wednesday showed that the U.S. economy contracted in the first quarter. The Commerce Department said gross domestic product fell at a 4.8% annualized rate in the January-to-March period after expanding at a 2.1% rate in the final three months of 2019.

Weekly Forecast

Last week’s price action was all about demand for risk and less about interest rates. This trend is likely to continue this week. The U.S. Dollar started the week on the back foot, reflecting more risk on trading conditions.

This week, traders will put more weight on the reopening of the economy along with brewing tensions between the Unites States and China.

With states across the U.S. letting nonessential businesses reopen and easing stay-at-home orders in an effort to restart the economy, investors are going to refocus on the number of coronavirus cases to see if the U.S. is doing the right thing, or if they have to go back to even stronger restrictions.

“The next 2-4 weeks are critical for both the economic crisis and the health crisis,” said Marc Chaikin, CEO of Chaikin Analytics. “The biggest risk to the stock market is a premature reopening of the U.S. economy. If rising COVID-19 curves reemerge and economies are shut down again the damage to the stock market’s psyche will be dramatic”

If fear returns to the markets then look for investors to flock to the U.S. Dollar for protection. This should drive up the USD/JPY.