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

The Dollar/Yen closed lower last week with most of the move generated by the U.S. Federal Reserve’s monetary policy statement and interest rate projections. The Bank of Japan also released its monetary policy statement last week.

The USD/JPY finished the week at 112.616, down 0.670 or -0.59%.

The Forex pair was pressured last week after the Fed raised interest rates as expected but did not signal a faster pace of monetary tightening this year.

The central bank raised the benchmark interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent. It also said that further rate increases would only be “gradual.” Fed officials also stuck with their outlook for two more rate hikes this year and three more in 2018.

Prior to the Fed’s decision, investors had been pricing at least four rate hikes this year. After the Fed announcement, U.S. Treasury investors had to adjust their portfolios due to the shift in sentiment. This sent Treasury yields lower, making the U.S. Dollar a less desirable investment.

After the Fed rate hike, the Bank of Japan’s monetary policy board voted 7-2 to keep its target for 10-year Japanese government bond yields at around zero, a policy it calls “yield-curve control.” It also left the short-term interest rate on some yen deposits held by commercial banks at minus 0.1%. Additionally, the central bank said it would continue to buy Japanese government bonds at an annual pace of around ¥80 trillion ($705 billion).

Forecast

Based on the Fed announcement and the BOJ’s decision, the direction of the USD/JPY is going to continue to be primarily influenced by the direction of U.S. Treasury yields. A rebound in Treasury yields will be supportive for the Dollar/Yen. Lower yields will be pressure the U.S. Dollar further.

Technically, the USD/JPY turned bearish on the close under 112.972. However, don’t expect an acceleration to the downside unless 111.583 fails as support. In this case, we could see an eventual sell-off into 110.283. Regaining $112.972 and holding above this level will likely mean the selling pressure is over for now.

There are no major reports out of Japan this week. In the U.S., investors will get the opportunity to react to the latest data on weekly unemployment claims and core durable goods. Fed Chair Janet Yellen is also scheduled to speak on Thursday, March 23.

Since the major reports are scheduled for late in the week, the price action early in the week is likely to be dictated by this week-end’s G20 decisions.