USD/JPY Fundamental Daily Forecast – Bullish Investors Hoping Yellen Makes Traders Forget About Trump’s Woes

The Dollar/Yen rallied to 114.492 on Tuesday, its highest level since March 15, but USD/JPY Fundamental Daily Forecast – Bullish Investors Hoping Yellen Makes Traders Forget About Trump’s Woeshose gains didn’t last as investors succumbed to a political bombshell in Washington and headed into the safety of the Japanese Yen.

Early in the session the dollar was coasting against the Japanese Yen, touching a four-month high on the back of a widening interest rate differential between U.S. government bonds and Japanese government bonds. The benchmark U.S. 10-year government bond yield has risen 25-basis points over the past two weeks.

The USD/JPY settled at 113.939, down 0.091 or -0.08%.

Investors were a little nervous at the start of the session due to concerns over the testimony before Congress by Fed Chair Janet Yellen on Wednesday, however, the tone of the market quickly shifted to near panic after President Donald Trump’s eldest son released an email chain suggesting he welcomed Russia’s help in last year’s election campaign. This revelation sent investors scurrying for the exit and into the safe-haven Yen.

The emails released by Donald Trump, Jr., raised many questions about the President’s knowledge of Russia’s attempts to influence the election. Whether Trump knew of the meeting or not is not the issue at this time. Traders reacted the way they did because it looks as if the Trump administration will continue to be plagued by this issue, putting a damper on its ability to fulfill its economic agenda.

In Fed news, Minneapolis Fed President Neel Kashkari said separately that U.S. banks are still too big to fail.

Fed Governor Lael Brainard said the central bank should soon begin reducing its balance sheet, as long as economic data on U.S. jobs and growth holds up.

Philadelphia Fed President Patrick Harker, a FOMC Member, told the Wall Street Journal that if inflation did not move toward the Fed’s 2 percent target, then this would be a reason to hold off raising rates.

In economic news, the NFIB Small Business Index came in below expectations at 103.6. The JOLTS report showed fewer than expected job openings, coming in at 5.67 million versus the 5.98 million estimate. Final Wholesale Inventories were 0.4% higher. This was slightly above the forecast and previous read.

Forecast

Dollar/Yen investors are going to be primarily focused on Yellen’s testimony because it will have a direct effect on the direction of U.S. interest rates. It will also highlight the divergence between Fed and Bank of Japan monetary policy. If she comes across as hawkish then look for the USD/JPY to firm.

However, gains may be limited by concerns over political risk due to the Trump emails and the on-going investigation of the Trump campaign’s possible involvement with the Russians in influencing the election.