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USD/JPY Fundamental Daily Forecast – BOJ on Tap, but Investors Still Focused on Fed

By:
James Hyerczyk
Published: Sep 20, 2017, 23:17 UTC

The Dollar/Yen surged on Wednesday, hitting its highest level since July 18 after the U.S. Federal Reserve signaled it may raise interest rates for a

Japanese Yen

The Dollar/Yen surged on Wednesday, hitting its highest level since July 18 after the U.S. Federal Reserve signaled it may raise interest rates for a third time this year even as inflation has remained below its 2-percent goal.

The USD/JPY settled at 112.169, up 0.580 or +0.52%.

The Fed also said it will begin reduction of the Fed’s $4.5 trillion balance sheet in October by allowing small amounts of Treasuries and mortgage-backed securities to run off. All nine members of the monetary policy committee voted for the action.

As far as reducing the balance sheet is concerned, Fed officials said that they will reduce it by $10 billion in Treasury and mortgage-backed securities a month, to start, by allowing bonds to mature without buying new ones.

The U.S. 2-year Treasury yield hit a high of 1.430 percent, its highest level since July 6. The U.S. 10-year Treasury yield climbed to 2.264 percent, its highest level since August 1. The 30-year Treasury yield edged up to 2.82 percent.

Current Fed policy requires the central bank to reinvest the proceeds from maturing bonds. Today, the Fed signaled it wants to wind down those reinvestments this year.

The announcement of the balance sheet trimming was the biggest news from Wednesday’s meeting. Additionally, the Federal Open Market Committee left its benchmark interest rate unchanged at<1.25 percent.

The FOMC did indicate a possible third rate hike before the end of the year, which would bring the target up to between 1.25 percent and 1.50 percent.

The central bank also downplayed the impact of Hurricanes Harvey and Irma on the economy, saying that they “are unlikely to materially alter the course of the national economy over the medium term,” other than temporarily lifting inflation because of higher prices for gas and other goods for which the supply chain was disrupted.

Fed members also said that they now project faster growth for 2017, with a median forecast of 2.4 percent gross domestic product growth, versus a June projection of 2.2 percent.

USDJPY
Daily USDJPY

Forecast

Early Thursday, the Bank of Japan will release its interest rate decision and monetary policy statement. The central bank is widely expected to leave its benchmark interest rate unchanged at -0.10 percent.

It is also expected to maintain its policy stance unchanged including its ‘QQE with yield curve control’.

According to Bloomberg, none of the economists it surveyed expect policy to change this week.

Essentially, the outlook for the BOJ to make any significant changes to its policy in the next 6 to 12 months remains fairly low.

I expect the USD/JPY to continue to be mostly driven by the direction of U.S. Treasury yields and demand for higher risk assets. I’ll be looking for a bullish tone today as long as the Forex pair remains over 111.749. The daily chart indicates there is room to the upside with 114.492 the next major upside target.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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