USD/JPY Fundamental Daily Forecast – Range Bound? Or Setting Up For An Upside Breakout?

The Dollar/Yen had a slight follow-through to the downside following yesterday’s huge reversal. The price action suggests investor indecision and impending volatility. In other words, the longer the Forex pair remains inside a range, the greater the breakout once investors decide which way they want to take it.

At 1000 GMT, the USD/JPY is trading 110.085, down 0.096 or -0.08%.

Despite the release of domestic data, the price action is being controlled by the direction of U.S. Treasury yields. Earlier today, Japan released its Trade Balance figure. It came in better-than-expected at 0.34 Trillion, well above the 0.20 Trillion estimate and 0.09 Trillion previous read.

Most of the earlier price action was related to political turmoil in Washington and mixed minutes of the U.S. Federal Reserve’s last meeting. Traders seem to have all but forgotten about the crisis between North Korea and the United States.

On Wednesday, President Donald Trump started the ball-rolling to the downside when he disbanded a panel of advisors. This news prompted investors to raise questions about his competence, sending U.S. Treasury yields lower. The USD/JPY began to retreat from its high on the news.

The Dollar/Yen turned lower for the session after the Fed minutes revealed a split Federal Open Market Committee. Some FOMC members wanted to delay raising interest rates. Others wanted the central bank to stay the course and continue its gradual tightening process. Both camps had their reasons for wanting to increase rates and wanting to keep rates where they were.

The uncertainty created by the FOMC raised doubts about the timing of the next Fed rate hike. It was strong enough to influence investors to reduce the chances of a December rate hike. This was bearish news for the U.S. Dollar.

Wednesday’s high at 109.944 is likely to remain intact until U.S. economic data and the Fed can convince investors that the economy is strong enough to encourage the central bank to raise rates later this year. A September rate hike is off the table. This means the economy and especially inflation will have about three months to sway the dovish Fed members to agree to a rate hike.

Forecast

The near-term direction of the USD/JPY will be determined by U.S. Treasury yields. Since the Fed minutes were released three weeks after the last Fed meeting, investors are going to have to decide if the economy has improved enough to change the opinions of the dovish FOMC members.

Traders have a series of reports today to digest but I don’t see anything that could sway the thought that the central bank will remain split on whether to raise rates before the end of the year. These reports include Weekly Unemployment Claims, the Philly Fed Manufacturing Index, Capacity Utilization, Industrial Production and the Conference Board’s Leading Index.

The market moving event today may be a speech by FOMC Member Robert Kaplan. Earlier in the week, he said he would “like to see more evidence that [the central bank is] making progress on our 2% inflation objective.” According to the FOMC Hawk/Dove Scorecard, Kaplan has been slightly hawkish. His comments are likely to cause volatility in the markets when he speaks at 1630 GMT.

The early price action suggests the USD/JPY could turn bullish again if buyers can sustain a rally over 111.045. However, the selling is likely to continue if 109.919 is taken out with conviction.