USD/JPY Fundamental Daily Forecast – Key Support 111.020, Could Get Boost from Hawkish Fed Commentary

After another sharp sell-off on Monday, the Dollar/Yen is trading higher early Tuesday in reaction to hawkish comments from a Fed official and a positive comment from President Trump regarding tax reform.

At 1137, the USD/JPY is trading 111.301, up 0.212 or +0.19%.

Forecast

Technically, the main range is 107.312 to 114.728. Its 50% to 61.8% retracement zone is 111.020 to 110.145. The market is currently straddling the upper or 50% level at 111.02. This zone is controlling the longer-term direction of the market.

Trader reaction to 111.020 is likely to determine the direction of the USD/JPY today. A sustained move over 111.020 will indicate the return of buyers after a 15-session sell-off. A sustained move under 111.020 could trigger an acceleration into 110.145.

There were no major reports from Japan on Monday. In the U.S., traders responded to hawkish remarks from Robert Kaplan, Dallas Fed President, in an essay posted on the central bank’s website and a positive tweet on tax reform from President Donald Trump.

“If we wait too long to see actual evidence of inflation, we may get behind the curve and have to subsequently raise rates more rapidly,” Kaplan said. “This type of rapid rate rise has the potential to increase the risk of recession,”

About the progress of U.S. tax reform, U.S. President Donald Trump tweeted, “The Tax Cut Bill is coming along very well, great support. With just a few changes, some mathematical, the middle class and job producers can get even more in actual dollars and savings and the pass through provision become simpler and really works well!”

Today’s session is filled with U.S. economic data and Fed news. Minor data includes the Goods Trade Balance, Preliminary Wholesale Inventories, the Home Price Index, S&P/CS Composite-20 HPI and the Richmond Manufacturing Index.

The major report is on Conference Board Consumer Confidence. It is expected to come in at 123.9, slightly below the previous 125.9.

FOMC Members William Dudley and Patrick Harker are also expected to speak. Dudley told the Wall Street Journal on Monday that he still expects that a very strong employment sector will help push inflation up over time.

Earlier in the month, Harker said he expects to back an interest rate hike next month despite caution over the low-inflation “conundrum,” since the U.S. central bank needs to prepare for any future economic shock.

Harker also said he has “lightly penciled in” a December rate hike, suggesting he had slightly less conviction about the policy decision than he had last month. Inflation, he said, “continues to elicit caution” about its weakness and also about the way in which it is measured.

In remarks prepared for his Tuesday hearing released by the Fed, Powell defended the central bank’s use of broad crisis-fighting powers positioning himself as an extension of the central bank policies of current Chair Janet Yellen and her predecessor Ben Bernanke.

Some analysts are saying Powell’s decisions on rates suggested that he is likely to be almost indistinguishable from those of Yellen, but they would not be surprised if in the next few months they see him taking a dovish path.

In other words, he is not likely to push to raise rates too much, but will instead monitor U.S. inflation and the job market.

Early Wednesday, the Reserve Bank of New Zealand will release its Financial Stability Report and RBNZ Governor Spencer will deliver a speech.

The price action by the AUD/USD and NZD/USD today will be largely dictated by the comments of the Fed officials. Hawkish comments about the direction of U.S. interest rates will pressure the Forex pairs. Dovish comments will be bearish for the U.S. Dollar. However, the dollar will be helped by positive developments regarding tax reform.

It all adds up to a possible above-average volatility session.

Hawkish commentary from Fed speakers Dudley and Harker and a hawkish outlook from the testimony of Jerome Powell should be positive for the USD/JPY. Also boosting the Dollar/Yen will be positive developments regarding U.S. tax reform.

Traders should also continue to monitor the price action in the U.S. stock market. Increased demand for higher risk assets should also weigh on the Dollar/Yen.