USD/JPY Fundamental Daily Forecast – Focus Shifts to North Korea, Flight to Safety Possibilities

The Dollar/Yen posted a two-sided trade on Wednesday before settling nearly unchanged. The price action suggests confusion over the Fed minutes and concern over the situation in North Korea.

The USD/JPY settled Wednesday’s session at 113.252, down 0.021 or -0.02%.

The Forex pair showed little change yesterday after the minutes from the Federal Reserve’s June 13-14 monetary policy meeting showed a fracture among policy-makers over the pace of future U.S. rate increases with signs of inflation softening.

The June minutes showed several Fed officials expressed concerns about muted inflation even though most agreed to raise rates by a quarter point last month.

The minutes also showed that Fed officials were concerned over the effect, or lack thereof, that their recent measures were having on financial markets. Specifically, the Fed is tightening, but government bond yields have actually declined.

Furthermore, policymakers also took note of the sharp rise in equity prices. FOMC members “suggested that increased risk tolerance among investors might be contributing to elevated asset prices more broadly; a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.”

The Fed also said that it believes the balance sheet can be reduced with “limited” disruption to financial markets, but did not say when it would begin trimming its balance sheet.

Forecast

Thursday’s price action suggests that USD/JPY traders may be pushing the Fed minutes aside for the time being and shifting their focus on the situation in North Korea.

The Forex pair is trading nearly flat ahead of today’s U.S. economic data while investors digest the latest news about North Korea.

According to CNBC, “The United States is prepared to defend itself and its allies using military force against North Korea in order to stop the country’s nuclear weapons program,” the U.S. Ambassador to the United Nations Nikki Haley said on Wednesday.

She added that a global diplomatic action was the preferred solution, but North Korea’s actions were “quickly closing off the possibility of a diplomatic solution.”

In economic news, traders will get the reaction to a number of U.S. reports including Challenger Job Cuts, the ADP Non-Farm Employment Change, Weekly Unemployment Claims and the ISM Non-Manufacturing PMI.

Minor reports include the Trade Balance and Final Services PMI. FOMC Member Jerome H. Powell is also scheduled to speak. Given the mixed signals from the Fed minutes, I expect Powell’s comments to carry more weight than the economic data. However, everything will be put on hold if the situation with North Korea escalates. Furthermore, I’m not sure investors want to rock the market too much ahead of Friday’s U.S. Non-Farm Payrolls report.

We could see another steady session today, but the USD/JPY could plunge if stock traders get nervous enough about North Korea to begin liquidating positions.