USD/JPY Fundamental Analysis – Forecast for the Week of March 13, 2017

The Dollar/Yen posted a strong gain last week. Most of the gains occurred early in the week as investors priced in the possibility of a series of quarterly interest rate hikes by the Fed throughout 2017. The Forex pair retreated on Friday, however, as fresh economic data suggested the economy may not be strong enough to handle another rate hike as early as June.

The USD/JPY finished the week at 114.738, up 0.744 or +0.65%.

Rising U.S. Treasury yields helped widen the interest rate differential between U.S. government bonds and Japanese government bonds, making the U.S. Dollar a more attractive investment. The buying was strong enough to drive the USD/JPY through the recent tops at 114.950 and 115.369. However, the rally to 115.501 stopped short of the last main top at 115.615. Sellers also showed respect for the major retracement zone at 115.121. This zone should be considered near-term resistance.

Dollar/Yen traders believe the March rate hike is a lock, but Friday’s mixed U.S. Non-Farm Payrolls report has raised some concerns over the frequency of future rate hikes.

The Non-Farm Employment Change showed the economy added 235K jobs in February. This was well above the 200K estimate. Last month’s number was revised upward to 238K. This news and the drop in the unemployment rate to 4.7% lent support to the March rate hike.

Helping to raise concerns over the pace of future rate hikes was average hourly earnings which came in at 0.2%. This was equal to the upwardly revised figure to January, but below the 0.3% estimate. This number helped drive down the U.S. Dollar by reducing the chances for frequent future rate hikes.

There were no major economic reports last week.

Forecast

The USD/JPY could weaken this week as investors adjust positions after digesting Friday’s mixed U.S. Non-Farm Payrolls report. The close for the week will be determined by Wednesday’s Fed monetary policy statement.

If the Fed sounds hawkish then this could mean more frequent rate hikes are still a possibility. This will increase of the odds of a rate hike in June, September and December. This would be bullish for the USD/JPY.

If the Fed’s statement is perceived as dovish then the central bank may skip a June rate hike, but still leave a September and/or December rate hike data dependent. This would be bearish for the USD/JPY.

Key U.S. reports include producer and consumer inflation, retail sales, building permits, manufacturing and consumer sentiment.

On March 16, the Bank of Japan is expected to leave its benchmark interest rate unchanged. In its monetary policy statement, it is expected to make references to current economic conditions and other factors affecting the policy decision. Expect to hear that the central bank is pleased with the direction of consumer inflation. It may also say that rising U.S. interest rates may be beneficial to the economy because it could pressure the Japanese Yen which will help increase demand for exports.