USD/JPY Fundamental Daily Forecast – Should Rally if U.S. GDP Comes in Higher-Than-Expected

For a third straight day, the Dollar/Yen straddled a technical retracement level at 112.236. The Forex pair also posted an inside move, which usually suggests investor indecision and impending volatility. The trend is up and the upside bias remains intact. The longer it trades in a tight range, the greater the breakout. All we can say at this point is prepare for a volatile move.

The USD/JPY settled at 112.322, down 0.019 or -0.02%.

Contributing to this week’s sideways trade is the choppy, two-sided trade in the Treasury and stock markets. On Wednesday, the Treasury markets traded mixed. Stocks, on the other hand, were bullish.

The price action suggests that buyers were influenced by greater demand for higher-risk assets. However, the lack of direction from the Treasurys suggests the rally was capped due to the lack of direction in the asset class.

The USD/JPY is also being underpinned by hawkish talk from several central banks signaling sooner than expected rate hikes. Although the European Central Bank is saying that investors misinterpreted remarks by ECB President Mario Draghi on Tuesday, he’s still being widely credited with igniting the USD/JPY rally, when he said that the ECB could trim its stimulus this year.

Bank of England Governor Mark Carney also made hawkish remarks about interest rates on Wednesday. The British Pound rallied after Carney said that the central bank is likely to need to raise interest rates as the British economy comes closer to operating at full capacity.

Finally, a pair of officials from the Bank of Canada also suggested the central bank could raise rates sooner-than-expected.

In other news, it was a mixed day as far as U.S. economic reports were concerned. The Goods Trade Balance came in at -65.0 billion. This just missed the -66.2 billion forecast. It also came in lower than the previous read. The slight narrowing of the deficit was actually good for the U.S. Dollar.

Preliminary Wholesale Inventories were a little bearish, increasing by 0.3%, higher than the 0.2% forecast. Last month’s number was revised from 0.1% to -0.5%.

Pending Home Sales were a big disappointment, falling 0.8% versus an estimate of a 0.9% gain. Last month’s report came in lower at 1.7%. Traders said fewer buyers signed contracts to buy existing homes in May, likely because they can’t find or afford what they want.

Forecast

The focus should be on interest rates at this time. This is because rising U.S. rates will widen the interest rate differential between Japanese Government Bonds and U.S. Treasury Bonds. Over the long-run, this could prove to be supportive for the U.S. Dollar.

Earlier today, Japanese Retail Sales came in below expectations. Later today, investors will get the opportunity to react to the Final GDP report for the last quarter. Investors are looking for GDP to come in at 1.2%.

The major U.S. reports on Thursday are Final GDP for the quarter and Weekly Unemployment Claims. The GDP report is expected to show the economy grew 1.2% and the weekly jobs data is expected to come in at 241K.

I expect the USD/JPY to rally if the GDP meets or exceeds expectations. We should see it break if the report misses. This is because a lower-than-expected report will reduce the chances of a Fed rate hike later this year.