USD/JPY Fundamental Daily Forecast – Recovering from Early Pressure on Reduced Fears Over North Korea

The Dollar/Yen traded lower early Wednesday, but the market has rebounded to nearly unchanged since reaching a low at 108.441. The trading conditions look similar to last week’s following North Korea’s missile launch over Japan.

At 1021 GMT, the USD/JPY is trading 108.724, down 0.078 or -0.07%.

On Tuesday, the Forex pair plunged on tensions over North Korea and comments from Fed speakers. Traders also remained nervous ahead of the European Central Bank’s monetary policy decision on Thursday.

The Dollar/Yen closed down 0.884 or -0.81% on Tuesday.

Investors continued to respond to the events in North Korea and the price action in the safe haven assets and the stock market strongly suggest that investors are getting concerned about the lack of progress towards reducing the threat of a nuclear war.

Investors were particularly keen on North Korea especially since Sunday, when it conducted its sixth and most powerful nuclear test to date. Although the news was met with condemnation from across the globe, yesterday’s price action in the stock market, for example, was the first time that it felt like investors were getting frustrated and more concerned about the lack of progress in squashing the situation.

On Monday, the G-7 released a statement condemning the nuclear test by North Korea. The White House said that “all options to address the North Korean threat are on the table,” according to Reuters.

The USD/JPY was further pressured on Tuesday after Fed Governor Lael Brainard said the U.S. central bank should go so far as to make it clear it is comfortable pushing prices modestly above the Fed’s 2-percent target.

“We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Brainard, a permanent voter on monetary policy, said in a speech in New York.

Later on Tuesday, Minneapolis Fed President Neel Kashkari said that the Fed rate hikes may be slowing inflation, wage growth, and job growth.

“There may be a lot more slack in the labor market than we appreciate,” Kashkari said. “The Fed may have allowed inflation expectations to drift lower.”

Forecast

The USD/JPY is likely to continue to react to the direction of U.S. Treasury yields and investor sentiment. The movement in U.S. Treasury yields is being fueled by economic data and Fed speakers. Investor sentiment is being controlled by geopolitical events surrounding North Korea.

On Wednesday, investors will get the opportunity to react to a few minor U.S. reports and one major. Minor reports include Trade Balance, Final Services PMI and the Fed Beige Book. The major report is the ISM Non-Manufacturing PMI. It is expected to come in at 55.8, up from 53.9.

The data itself is probably not important enough to move the USD/JPY. Additionally, the main focus for investors seems to be North Korea, but this is a wildcard. On Tuesday, the fear of uncertainty showed up for the first time with investors taking off positions in the stock market and putting the money into the safe haven Yen. Look for a repeat performance today if stocks sell-off again.