USD/JPY Fundamental Daily Forecast- Continues to Spin Inside Tight Range; Indication of Impending Volatility

The Dollar/Yen broke early in the session on Wednesday, but made a solid recovery before closing lower for the session. The Forex pair weakened as investors positioned themselves ahead of Friday’s U.S. Non-Farm Payrolls report, while reacting to fresh economic data and a speech later in the session by Fed Chair Janet Yellen. Another strong rally in the U.S. stock markets limited losses.

The USD/JPY settled the session at 112.753, down 0.078 or -0.07%.

Wednesday’s weakness did nothing to diminish the strong upside bias that has developed recently. Improving U.S. economic data along with the prospect of U.S. tax reform and rising expectations that the Federal Reserve will raise rates a third time in December have boosted the Greenback in recent weeks.

After the early session weakness, the USD/JPY attempted a dramatic comeback after the release of stronger-than-expected U.S. economic data.

According to ADP, U.S. private employers added 135,000 jobs in September, exceeding economists’ expectations even as the hurricanes “significantly impacted smaller retailers.” Traders were looking for a gain of 131,000. Last month’s report was revised down to 228,000.

The ISM Non-Manufacturing Index rose to its highest level since August 2005 in September and the prices paid index reached its highest level since February 2012. The ISM Services Index came in at 59.8, beating the estimate of 55.5.

Late in the session, Fed Chair Janet Yellen did not comment on the economy or monetary policy in prepared remarks at a community banking conference on Wednesday.

The late session rally also seemed to indicate that investors have priced in the news that U.S. President Trump will appoint a less hawkish head of the Federal Reserve than previously expected.

At the end of the day, data showed that interest rate futures traders were pricing in an 83 percent likelihood of a December rate increase, up from 78 percent on Tuesday, according to the CME Group’s FedWatch Tool.

Forecast

There were no major reports from Japan early Thursday so today’s session is likely to be controlled by the same factors:  rising expectations of a Fed rate hike, increasing demand for higher risk assets and a stronger U.S. Dollar.

The key level to watch is 113.251. Despite the recent bullish news, this price has held as resistance since September 27. Besides being resistance, it is also the trigger point for a technical breakout to the upside. The daily chart shows there is room to rally to 114.492.

I wouldn’t start to worry about the uptrend until 111.463 failed as support.

On Thursday, investors will get the opportunity to react to the Challenger Job Cuts report, weekly Unemployment Claims and Factor Orders.

FOMC Members Jerome Powell and Patrick Harker are scheduled to speak.

In June, Philadelphia Federal Reserve Bank President Patrick Harker said that the U.S. central bank remains on track to meet its inflation goal and reiterated his support for a further two interest rate increases this year. This likely means he is going to deliver a hawkish speech which will be bullish for the USD/JPY.

Powell was recently interviewed by President Trump to replace Fed Chair Yellen. Experts say he would not be a large step away from a Yellen-led Fed and would thus represent policy continuity for markets.