USD/JPY Fundamental Daily Forecast – Could Rally if A Dovish Yellen Drives Up U.S. Equities

The Dollar/Yen rebounded on Thursday from the previous day’s sell-off. The Forex pair remained rangebound, but early Friday it was inching towards the top of the week’s range.

The USD/JPY finished Thursday’s session at 109.536, up 0.510 or +0.47%. At 0800 GMT, the Forex pair is trading 109.681, up 0.139 or +0.13%.

Most of today’s early price action is likely position-squaring ahead of a summit of central bankers in Jackson Hole, Wyoming. The highlight of the today’s session will be key speeches by Federal Reserve Chair Janet Yellen at 1400 GMT and European Central Bank President Mario Draghi at 1900 GMT.

Although both top central bankers are expected to stay on script and reveal nothing that could shake up the markets, the current price action suggests investors may be bracing for news on further U.S. rate hikes, the timing of its balance sheet tapering and if Europe is looking to curtail stimulus.

On Thursday, investors’ focus shifted from geopolitics and political turmoil in Washington to the central bankers’ symposium in Jackson Hole and monetary policy.

Although the theme of the Jackson Hole Conference this year is ‘fostering a dynamic global economy’, speculators bought the dollar as a precaution just in case Draghi and Yellen drop hints about future plans.

In other news, U.S. Weekly Unemployment Claims came in at 234K, slightly below the 237K estimate, and a little higher than last week’s figure.

Existing Home Sales unexpectedly fell in July to their lowest monthly level of the year due to a lack of properties for sale, which also continued to push up prices.

Kansas City Fed President Esther George told CNBC on Thursday that the economy was strong enough to handle more rate hikes, despite recent readings of weak inflation.

“I think we should continue with the gradual rate path,” George said from Jackson Hole. “While we haven’t hit 2 percent, I’m reminded that 2 percent is a target over the long term, and in the context of a growing economy, of jobs being added, I don’t think it’s an issue that we should be particularly concerned about unless we see something change.”

Forecast

Prior to Yellen’s and Draghi’s speeches, traders will get a chance to respond to the latest U.S. Durable Goods report. Core Durable Goods Orders are expected to come in at 0.4%. Durable Goods Orders are forecast to decline 6.0%.

In Japan, core consumer prices inched up for a seventh straight month in July from a year earlier, but the gain was a tepid 0.5 percent and driven largely by higher fuel bills. The Yen showed little reaction to the news.

At Jackson Hole on Friday, most investors don’t anticipate any major statements on increasing interest rates from Yellen or Draghi.

Going into the speeches, market expectations for a rate hike in December are just 37.6 percent, according to the CME Group’s FedWatch tool. This is actually bearish for the U.S. Dollar.

Since the market is not expecting a December rate hike, investors could get caught off-guard if Yellen says anything hawkish about the timing of the next Fed rate hike.

Unless Yellen or Draghi say something important pertaining to policy, I don’t expect much of a reaction in the Forex markets. We could, however, have some wild swings because of thin trading conditions. Volume is expected to remain light until after the September 4^th, U.S. Labor Day holiday.

The USD/JPY will also be influenced by demand for higher risk assets. A dovish Yellen should be supportive for stocks. Increased demand for risky assets could be supportive for the dollar/Yen.

Traders are going to have to decide if the direction of interest rates or risk sentiment will be the driving force in the markets today. Ultimately, the direction will be determined by the movement in the U.S. Treasury yields.