USD/JPY Fundamental Daily Forecast – Further Losses Likely if Tax Reform Stalls

The Dollar/Yen is trading higher early Thursday. The Forex pair followed through to the upside following yesterday’s recovery from a steep sell-off early in the session. However, the market is still trading inside yesterday’s range which suggests investor indecision and impending volatility.

At 1031 GMT, the USD/JPY is trading 113.183, up 0.315 or +0.28%.

Technically, the trend turned down on Wednesday when sellers took out the previous main bottom at 112.950. A trade through 114.728 will change the main trend to up.

If the downside momentum continues, we could see a move into the next major bottom at 111.646, but this is not likely unless there is a steep sell-off in the equity markets which triggers a flight to safety rally.

The price action was set in motion by better-than-expected U.S. economic data. On Thursday, reports showed a surprise rise in retail sales last month and an uptick in underlying inflation which solidified the chances for an interest rate hike in December.

The Labor Department said on Wednesday its Consumer Price Index edged up 0.1 percent last month after jumping 0.5 percent in September. Traders were looking for an increase of 0.1 percent in October.

U.S. Retail Sales rose 0.2 percent last month. Economists had expected an unchanged reading.

Forecast

On Thursday, investors will get the opportunity to react to several U.S. economic reports. These include Weekly Unemployment Claims, Import Prices, the Philly Fed Manufacturing Index, Capacity Utilization and Industrial Production.

However, the main focus is likely to be on tax reform and whether the Republican Senate and House of Representatives can work out their differences before the end of the year.

On Wednesday, a U.S. Senate Republican tax plan drew fire from two Republican lawmakers in a possible sign of trouble since the political party can afford to lose no more than two votes to pass the legislation.

If it looks as if the process is going to drag on, investors will start selling stocks and bonds which will drive the U.S. Dollar lower against the Japanese Yen. If you follow the technical trend indicator then the USD/JPY is likely to extend its losses.