USD/JPY Fundamental Analysis – Forecast for the Week of February 20, 2017

The Dollar/Yen posted a two-sided trade last week, first supported by rising U.S. Treasury yields and increased demand for higher risk assets then pressured as investors reduced the odds of a rate hike in March by the Fed and increasing concerns over the upcoming election in France.

The USD/JPY closed the week at 112.789, down 0.375 or -0.33%.

Technical factors also played a role in the late sell-off last week. Selling pressure may have increased after buyers failed to overcome a key resistance level at 115.121 and a pair of tops at 115.369 and 115.615.

Rising stocks and Treasury yields and the prospect of a March Fed rate hike helped drive the USD/JPY higher during the early part of the week. All three major U.S. stock indexes reached new record highs, driven by bullish comments on tax reform the week before by President Trump.

The move was further supported by robust U.S. economic data and hawkish testimony from Fed Chair Janet Yellen on her first day of testimony before Congress.

In U.S. news, producer prices rose more than expected in January, coming in at 0.6 percent last month. Retail Sales rose 0.4% in January, beating the 0.1% estimate, but coming in under the previous 1.0% read. The consumer price index jumped 0.6 percent last month after gaining 0.3 percent in December. January’s increase in the CPI was the largest since February 2013.

In prepared remarks before the U.S. Senate Banking Committee, Yellen said the central bank will likely need to raise interest rates at one of its upcoming meetings in March or June. Yellen also expressed caution amid considerable uncertainty over economic policy under the Trump administration.

By mid-week, the rally was over for the USD/JPY. Yellen may have helped put in the top after she offered no additional insight on the timing of the central bank’s next rate hike. Based on the price action by the dollar into the end of the week, it looks as if investors are betting against a rate hike in March after Yellen sounded unconvincing.

The uneasiness on the political front over Trump’s policies and the upcoming elections in Europe especially in France also drove investors into safe haven assets like U.S. Treasurys, gold and the Japanese Yen.

Forecast

Political uncertainty in France and worries over Trump’s ability to run the government may pressure the USD/JPY this week. Weaker equity prices may lead to increased demand for safer assets, which would be supportive for the Yen. USD/JPY investors will also be watching the direction of U.S. Treasury yields. A further decline in yields should help boost demand for the Yen. The FOMC meeting minutes on Wednesday will be the major report to watch. Traders are hoping the minutes will tell them whether the Fed is on course to raise rates in March.