USD/JPY Fundamental Daily Forecast – Market Moving Event Will Be Fed Balance Sheet Details

The Dollar/Yen was under pressure earlier in the session before climbing back to nearly unchanged for the session. The Forex pair was pressured by flight-to-safety buying in reaction to renewed tensions over North Korea after the rogue nation launched another missile over the week-end. Gains are being capped ahead of the release of the U.S. Federal Reserve meeting minutes.

At 0700 GMT, the USD/JPY is trading 113.276, up 0.019 or +0.00%.

The safe-haven buying came about after North Korea tested another missile over the week-end. Asian investors were primarily behind the buying of the Japanese Yen today. They’re more than happy to drive up the Yen whenever North Korean tensions arise. When U.S. investors return later today after the one-day holiday, we could see a different reaction because their focus may shift to the Fed minutes.

Later today at 1800 GMT, investors will get the opportunity to react to the minutes of the Fed’s June meeting. Traders want to know how committed the central bank is to raising rates before the end of the year. The minutes may also reveal details on the Fed’s plan to trim its massive balance sheet.

Traders widely expect the Fed minutes to reveal the central bank is hawkish on interest rates so the market moving event will be the information it reveals about its plan to trim its balance sheet.

Investors are hoping for more details of the scale, timing and interaction of this trimming of the balance sheet with the pace of the rate hikes. With this information, investors will gain a better idea of how the liquidity trade will unwind. The liquidity is the $4.5 trillion in debt on the Fed’s balance sheet.

Market participants need to know the details of the Fed’s plan because the debt it will be trimming is what the central bank used to help the U.S. overcome the financial crisis.

If the Fed is perceived as pulling the stimulus too quickly, the U.S. Dollar will probably rise and the Japanese Yen should weaken. If the Fed decides to withdraw gradually then we may see the Japanese Yen firm.

In other news, U.S. Factory Orders are expected to come in 0.5% lower. The IBD/TIPP Economic Optimism report is expected to come in at 51.6, up slightly from 51.3.

Look for a bullish tone today if investors downplay North Korea and the Fed is more hawkish than expected. The Japanese Yen could firm if the North Korean situation escalates and the Fed’s tone is less-hawkish than expected.