USD/JPY Weakens on Uncertainty Over Timing of Fed Rate Hikes

The Dollar/Yen is down for a third session on Tuesday as investors continued to book profits and square positions following last week’s strong rally. Another dip in Treasury yields is the catalyst behind the price action.

That change in direction follows slightly cautious remarks from four U.S. Federal Reserve policymakers about how many interest rate hikes will follow an expected first one in March. Meanwhile, there was some good domestic economic news with Japan’s January factory growth hitting nearly an eight-year high.

At 10:53 GMT, the USD/JPY is trading 114.709, down 0.414 or -0.36%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $81.47, up $0.10 or +0.12%.

Fed Policymakers See March Rate Hike, but No Roadmap after That

Federal Reserve policymakers say they’ll raise interest rates in March but spoke cautiously on Monday about what might follow, signaling a desire to keep options open in the face of an uncertain outlook for inflation and a pandemic still ongoing, Reuters reported.

Despite forecasts by Wall Street analysts that five, six or even seven interest-rate hikes will be needed this year, the four resisted laying out the kind of clear policy path that markets have come to expect from recent tightening cycles, Reuters added.

Japan Jan Factory Growth Hits Near 8-Year High – PMI

Japan’s manufacturing activity grew at the fastest pace in nearly eight years in January on stronger output and new orders, while cost pressures stayed elevated as firms continued to face supply chain delays, Reuters reported.

The supply chain disruptions forced businesses to build up safety stocks, with the survey showing holdings of raw materials increased at the strongest rate in nearly eight years.

The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) in January rose to 55.4 on a seasonally adjusted basis, up from a 54.6 flash reading and the previous month’s final of 54.3.

That marked the fastest growth since February 2014 and the 12^th straight month of expansion in manufacturing activity.

Daily Forecast

Fed policymaker comments like, “We definitely are poised for a March increase, but after that, I want to see what the data brings us,” creates uncertainty. And when investors see uncertainty, they tend to sell or at least reduce risky positions.

That’s what we’re seeing in the USD/JPY market. That comment from San Francisco Fed President Mary Daly was enough to encourage to lighten up on the long side.

Furthermore, there is some nervousness ahead of today’s U.S. Bureau of Labor Statistics December Job Openings and Labor Turnover Survey (JOLTS) at 15:00 GMT and Friday’s U.S. Non-Farm Payrolls report.