USD/JPY Fundamental Daily Forecast – Short Squeeze, Concerns Over Future U.S. Rate Hikes Driving Yen Higher

The Dollar/Yen is trading lower after an early session rally failed to attract enough buyers to extend the two day move. The Forex pair is now trading lower and in a positon to take out last week’s low at 111.062. A move through this level will signal a resumption of the downtrend.

At 1040 GMT, the USD/JPY is trading 111.209, down 0.277 or -0.25%.

There is a short squeeze going with Japanese Yen buyers aggressively shaking the tree to drive the weaker short-sellers out of the currency.

Japanese Yen buyers are also reacting to weaker stock markets in China and South Korea and positioning themselves for potential volatility in U.S. stock indexes due to uncertainty ahead of the Senate vote on the Republican’s tax plan later this week. The yen is the biggest beneficiary of today’s risk aversion.

Forecast

The USD/JPY is likely to remain under pressure today unless a major buyer comes in to defend last week’s low at 111.062 and the major 50% level at 111.020.

Taking out 111.062 will signal a resumption of the downtrend while a failure to hold 111.020 could drive the USD/JPY into the major Fibonacci level at 110.145.

The main concern for the U.S. Dollar is a weakening inflation outlook in the U.S., which has cast doubt about how aggressively the Fed will need to raise rates over the next few years.

Another concern is U.S. tax reform which could impact U.S. equity prices and investor appetite for risk. The Senate is expected to vote on its version of the tax bill on November 30. With a slim Republican majority of just two in the Senate, the vote can easily fail and cause a widespread market selloff.

Finally, traders will be watching the Congressional hearing on Fed Chair nominee Jerome Powell on Tuesday. They want to know his views on monetary policy and the U.S. inflation picture. Current Fed Chair Janet Yellen is also scheduled to give her semi-annual testimony on monetary policy on Wednesday.

The USD/JPY could break sharply later today if 111.020 is taken out with strong selling volume. A move through 111.684 could lead to a breakout to the upside.