USD/JPY Fundamental Daily Forecast – Increasing Volatility Due to Speculation Over Fed Chair Selection

The Dollar/Yen closed lower on Wednesday, producing a potentially bearish technical chart pattern in the process. Early in the session, the market surged to 114.238, putting the Forex pair within striking distance of the July 11 top at 114.492.

The USD/JPY settled at 113.728, down 0.175 or -0.15%.

Early in the session on Wednesday, the Dollar/Yen was supported by reports that Republican senators told President Trump that they favored Stanford University economist John Taylor as the next head of the U.S. Federal Reserve.

The news drove up U.S. Treasury yields which also helped underpin the U.S. Dollar. The rising yields also widened the spread between U.S. Government Bonds and Japanese Government Bonds, making the dollar a more attractive investment. It also highlighted the divergence between the U.S. Federal Reserve which is moving towards tightening and the Bank of Japan which is continuing to maintain a loose monetary policy.

The Forex pair turned around late in the session and closed lower after a steep drop in U.S. equity markets sent investors into the safety of the Japanese Yen.

In other news, Core Durable Goods Orders rose 0.7% and Durable Goods Orders rose 2.2%. Traders were looking for an increase of 0.5% and 1.0 percent respectively.

The Commerce Department said on Wednesday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1.3 percent last month after an upwardly revised 1.3 percent increase in August.

The government also said it was unable to isolate the effects of Hurricanes Harvey and Irma on the data as the survey is “designed to estimate the month-to-month change in manufacturing activity at the national level and not at specific geographic areas.”

The Home Price Index rose 0.7% versus a 0.4% estimate and New Home Sales jumped to 667K units versus a 555K estimate. The rise in new home sales was a surprise as sales hit their highest level in nearly 10 years.

Forecast

The USD/JPY is under pressure early Thursday as investors await the European Central Bank’s monetary policy decision.

Also putting pressure on the Dollar/Yen are the results of a Reuters poll which show Jerome Powell likely will be the next Federal Reserve chairman according to a slim majority of economists. But most of them said current Fed Chair Janet Yellen would be the best option.

If Trump decides to choose economist John Taylor then the USD/JPY is likely to rally though 115 because he is expected to take an aggressive approach towards raising interest rates. If Trump chooses someone who is seen as being less hawkish than Taylor for the Fed’s top post, the dollar may have a hard time taking out this level.

Traders should continue to monitor the direction of U.S. Treasury yields and U.S. equity markets. High yields and higher stocks will be supportive for the USD/JPY. Lower yields and equity prices will put pressure on the Dollar/Yen.

Today’s economic news includes Weekly Unemployment Claims, the Goods Trade Balance, Preliminary Wholesale Inventories and Pending Home Sales.