USD/JPY Fundamental Daily Forecast – Trader Reaction to 111.749 Will Set the Tone for the Day

The Dollar/Yen is trading slightly higher shortly before the U.S. opening. The Forex pair is trading at its highest level since July 26 while straddling a key technical retracement level on the daily chart.

At 1029 GMT, the USD/JPY is trading at 111.628, up 0.68 or +0.06%.

Driving the USD/JPY higher is surge in U.S. Treasury Bond yields. On Monday, the benchmark 10-Year U.S. Treasury yield reached a one-month high of 2.237 percent. That’s up 22 basis points from 10-month lows set on September 8.

The spread between U.S. Government Bonds and Japanese Government Bonds has also widened, making the dollar a more attractive asset and driving the carry trade. Stock investors are also driving the carry trade by taking advantage of the low Japanese interest rates. Investors are borrowing in Yen and moving the money into U.S. stock markets.

At this time, traders appear to be less-focused on geopolitical events surrounding North Korea and more focused on the U.S. Federal reserve which begins its two-day monetary policy meeting today.

The current price action in the Treasury markets also suggests that investors are now preparing for potentially more hawkish statements from the Federal Reserve on Wednesday, especially after the Bank of England surprised investors last week with talk of a possible rate hike.

On Wednesday, the Fed is widely expected to leave interest rates unchanged. However, investors remain on the fence for a December rate hike. Investors will be watching for fresh hints on the chances of another rate hike this year and how many could be expected in 2018.

In other news, Japanese investors are showing little reaction to the possibility of Japanese Minister Shinzo Abe calling a snap election for as early as October to take advantage of his improved ratings and disarray in the main opposition party.

Later today, investors will get the opportunity to react to several reports from the United States. The major report is building permits. It is expected to show the economy added 1.22 million permits.

The U.S. current account is expected to come in at -115 billion. Housing starts are expected to come in slightly better than the previous month at 1.17 million. Import prices should show a 0.4% rise.

The direction of the USD/JPY is likely to be determined by trader reaction to the major technical Fibonacci level at 111.749.

Overtaking 111.749 could create enough upside momentum to overtake the July 26 main top at 112.190. This is the trigger point for an acceleration to the downside.

The inability to overtake 111.749 could trigger a break back to 110.902. If this price fails as support then momentum will shift to the downside.

Upside momentum is strong but long traders should continue to have an exit strategy in place just in case geopolitical concerns return.