USD/JPY Fundamental Analysis – Forecast for the Week of February 27, 2017

The Dollar/Yen touched a two-week low last week as investors cast doubt on the likelihood that President Trump will be able to move swiftly on his tax reform and fiscal spending plans. U.S. Treasury yields weakened on the news, making the dollar a less attractive investment. Earlier in the week, the Forex pair was pressured after the Fed minutes failed to assure investors that the central bank would raise rates more aggressively this year.

The USD/JPY closed the week at 112.098, down 0.691 or -0.61%.

The Japanese Yen began to pick-up strength against the U.S. Dollar at mid-week after the minutes from the Fed’s February monetary policy meeting, suggested the central bank could raise rates more aggressively this year, and that the next increase could come “fairly soon.” However, U.S. Dollar bulls were looking for stronger language from the Fed and for a clearer signal that the central bank was preparing to tighten monetary policy as early as its March 15 meeting.

The USD/USD was pressured further by the lack of clarity on how the Trump administration will fulfill its promised tax cuts and infrastructure spending. The odds of a rate hike in March and June deteriorated further later in the week after Treasury Secretary Steven Mnuchin said he wants to see “very significant” tax reform passed before Congress’ August recess.

The Dollar/Yen had been pushed higher since the election of President Trump after he made repeated campaign promises for tax reform and regulatory cuts. Mnuchin’s comments suggest that Trump’s plan is now unclear and could prove to be a tough task as U.S. lawmakers will now be forced to work through a complex agenda in a timely manner to satisfy the Fed. This could pressure U.S. interest rates, making the U.S. Dollar a less-desirable investment.

Forecast

The weak close by the USD/JPY on Friday suggests strong downside momentum may be building. This could trigger a break into the low of the year at 111.583. The market may find support there while investors wait for more news that could eventually drive the Forex pair into the major 50% level at 109.919.

There are no major reports from Japan this week, but plenty from the U.S. including speeches from several key members that are likely to cause volatility. Since the market has turned dovish on a March rate hike, we could see the return of volatility if this week’s scheduled Fed speakers continue to maintain a hawkish tone.

This week, the U.S. will report on Durable Goods, Preliminary GDP and PMI data. However, the USD/JPY is likely to react the most to speeches by FOMC Member Robert Kaplan on Monday and Wednesday. Lael Brainard is also scheduled to speak on Wednesday. The week ends with key speeches from FOMC Members Charles Evans and Jerome Powell as well as Fed Chair Janet Yellen.