USD/JPY Fundamental Daily Forecast – Supported by Fed Plan and Higher Demand for Risk

The Dollar/Yen posted a higher close on Thursday as investors reacted positively to the Fed’s plan to shrink its balance sheet and increased demand for higher risk assets.

The USD/JPY finished the session at 111.822, up 0.346 or +0.31%.

Trading was lackluster on Thursday as investors continued to digest the minutes from the Fed’s May 3 monetary policy meeting and the results of the OPEC-led meeting on extending production cuts.

On Wednesday, the latest minutes from the Fed indicated that Federal Open Market Committee members were in broad agreement at their May 3 meeting to begin shrinking the Fed’s balance sheet. Initially, the USD/JPY weakened on the news, but the dollar began to strengthen early Thursday as investors began to understand the impact of the Fed’s plan.

Although the FOMC minutes said that most officials judged “it would soon be appropriate” to tighten rates again, supporting odds of a June hike, discussion that “it would be prudent” to ensure that evidence confirms the transitory nature of the First Quarter slowdown may throw some doubt into the timing of further hikes, traders said.

In the U.S., Weekly Unemployment Claims came in at 234K, rising slightly from last week’s 233K read. Investors were looking for a read of 238K.

The U.S. Goods Trade Balance came in at minus 67.6 Billion. This was lower than the expected 64.7 Billion and the previous 65.1 Billion.

Preliminary Wholesale Inventories were down 0.3%. This was better than the 0.2% forecast and the revised 0.1% posted last month.

On Thursday, Federal Reserve Governor Lael Brainard said that a brighter global economy is posing less risk to the Fed’s outlook for the U.S.

“The global economy is brighter than it has been for the last few years,” Brainard said at a panel at the Center for Global Development.

Her comments seemed to reiterate the signal sent by the Fed in its May meeting minutes that the central bank is likely to move forward with an expected rate increase in June.

In the minutes, the central bank seemed to be implying that global risks were receding after years in which volatility in China, collapsing oil prices and slow growth in Europe slowed the Fed from planned rate increases.

The benchmark S&P 500 Index and the technology-based NASDAQ Composite Index posted new all-time highs and closes on Thursday. This activity is a sign of increased demand for higher-risk assets at the detriment of the lower-yielding Japanese Yen.