USD/JPY Fundamental Daily Forecast – Trader Reaction to 111.640 Will Set Tone for the Day

The Dollar/Yen broke sharply on Tuesday in reaction to lower U.S. Treasury yields which helped tighten the spread between U.S. Government Bonds and Japanese Government Bonds (JGPs). This tightening of the interest rate differential made the Japanese Yen a more attractive asset.

The USD/JPY settled at 112.046, down 0.574 or -0.51%.

Coming into Tuesday’s session, the USD/JPY was already under pressure due to muted inflation and diminished prospects for a third rate hike in 2017. With investors already nervous, it didn’t take much to drive the U.S. Dollar lower. The catalyst behind the selling pressure on Tuesday was the Republican legislators’ failure to repeal Obamacare and their inability to pass their own healthcare plan.

With the financial markets rattled by doubts the Trump administration will be able to pass health care reform, as well as tax reform and a massive infrastructure plan as promised during President Trump’s campaign, investors flocked to the safety of the Japanese Yen.

In other news that affected the Dollar/Yen relationship, U.S. Treasury yields fell in response to the news about the health care bill. This helped drive the U.S. Dollar lower against a basket of currencies. The benchmark 10-year Note yield fell to 2.27 percent, while the two-year yield hovered around 1.35 percent.

U.S. Import Prices fell 0.2%, in line with expectations. The NAHB Housing Market Index dropped from a revised 66 to 64. This was also below the 67 forecast. Despite the decline, a 64 reading is still above the benchmark 50, which indicates a favorable outlook on home sales. TIC Long-Term Purchases came in at 91.9 billion, well above the 20.3 billion estimate and the previously revised 9.7 billion.

Forecast

Volume continues to remain low this week, mostly due to anticipation of the Bank of Japan’s interest rate decision and monetary policy statement early Thursday. The central bank is widely expected to leave its benchmark interest rate at –0.10. In its monetary policy statement, officials could mention their concerns over rising global interest rates and their impact on government policy.

In economic news, traders will get the opportunity to react to a number of U.S. reports on Wednesday. The major report is building permits. It is expected to come in at 1.20 m. Coming out at the same time is Housing Starts. They are expected to increase by 1.16 million.

On Tuesday, the USD/JPY broke sharply, but the selling stopped slightly above the major 50% level at 111.64. This could trigger a technical bounce today. Dollar/Yen bulls will be helped by better-than-expected housing data.

Based on yesterday’s price action and today’s, the direction of the USD/JPY will likely be determined by trader reaction to the 111.640 level. Look for an upside bias to develop on a sustained move over this level and for selling pressure to increase on a sustained move under this 50% price.