USD/JPY Traders Dealing with Fed, Russia/Ukraine Issue

The Dollar/Yen fell for a fourth straight session on Friday and could be set for an even further fall due to fundamental and technical factors. Most of the selling last week was fueled by weakness in the global equity markets.

At a time of market uncertainty, investors tend to park money in the safe-haven Japanese Yen. Last week’s equity market slump in Asian, European and American stocks was fueled by jitters over the pace of monetary policy tightening by central banks and weak economic data.

On Friday, the USD/JPY settled at 113.699, down 0.438 or -0.38%. The Invesco CurrencyShares Japanese Yen Trust ETF finished at $82.57, up $0.42 or +0.51%.

Dollar/Yen Dipped Along with Treasury Yields Ahead of Federal Reserve Meeting.

The USD/JPY was also pressured on Friday, along with U.S. Treasury yields, while investors looked ahead to this week’s Federal Reserve meeting for more clarity on the outlook for rate hikes.

Expectations that the Fed will tighten monetary policy at a faster pace than previously anticipated had driven a rise in yields and the dollar earlier last week. Additionally, despite Friday’s weakness, the U.S. Dollar was still on pace to post it best performance since December.

U.S. Treasury yields fell as stock market declines reflected poor risk appetite, while concerns about potential conflict in Ukraine drove demand for the safe-haven debt.

Short-Term Outlook

The futures markets are pricing in as many as four rate hikes this year, starting from March and expect the Fed to start trimming its $8 trillion-plus balance sheet within months. This week’s Fed meeting could shed some light on how fast it will tighten.

Last week’s price action suggests a two-sided trade is possible as bullish investors eye an aggressive Federal Reserve and bearish traders face the potential Russian invasion of Ukraine.

Investor focus could shift back to the Fed on Monday after Goldman Sachs said over the weekend that inflation could push the Fed into more than four rate hikes this year. This could underpin the USD/JPY early in the week.

There weren’t any major developments over the weekend regarding Ukraine/Russia. However, Secretary of State Blinken warned of a severe response if a single Russian force enters Ukraine in an aggressive way.

Conclusion:  Look for a possible two-sided trade with bullish traders betting on a more aggressive Fed and bearish traders reacting to stock market weakness.