USD/JPY Fundamental Daily Forecast – Set-up For Deep Plunge Under 109.919

The Dollar/Yen retreated on Thursday after investors moved money into the Japanese Yen for safety. The catalyst behind the flight-to-safety buying was softer-than-expected U.S. services data and a report that a grand jury will investigate allegations of Russian meddling in the 2016 U.S. presidential election.

The USD/JPY settled at 110.041, down 0.695 or 0.63%.

The initial weakness on Thursday was fueled by a weak report from the Institute for Supply Management (ISM) which showed its non-manufacturing index fell to 53.9 in July from 57.4 in June. This tightened the spread between U.S. government bonds and Japanese government bonds because it raised doubts that the Federal Reserve would raise interest rates again in 2017.

Investors also poured money into the Japanese Yen late in the session after U.S. stocks retreated into the close. The selling was fueled by a report indicating that investigators were turning up the heat on the Trump campaign’s involvement with Russia in influencing the U.S. election. Traders also felt that this news means the Trump administration’s economic agenda will be delayed further.

Forecast

The recent price action strongly suggests that investors are already starting to seek shelter in the Japanese Yen. The divergence between the stock market’s gains and the Japanese Yen’s weakness suggests investors are leveraging stock positions very aggressively via the carry trade.

Yesterday’s report showing slowing services growth suggests a greater chance of payrolls disappointing on Friday. This would mean lower chances of a Fed rate hike which would keep the USD/JPY under pressure.

Economists are looking for Friday’s U.S. Non-Farm Payrolls report to show employers added 183,000 jobs in July, down from 222,000 in June. The Unemployment Rate is expected to fall to 4.3%, down from 4.4% and Average Hourly Earnings are expected to rise slightly by 0.3% from 0.2% in June.

Average Hourly Earnings will be watch closely because they are a key indicator of inflation. Treasury yields and the Dollar are likely to weaken if this number misses the estimate because it will diminish the chances of a Fed rate hike later this year.

Going into the report, Fed funds futures implied a roughly 44 percent chance of a Fed rate hike in December, according to CME Group’s FedWatch tool.

The main range is 101.179 to 118.658. Its 50% level is 109.919 and its 61.8% retracement level is 107.856.

Currently, the USD/JPY is trying to establish support at 109.919. If this price fails as support then look for a plunge over the near-term term to 107.856.

Another key level to watch is 108.788. This low was establish when the Fed made its last rate hike in June.