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USD/JPY Fundamental Weekly Forecast – Traders Will React to Fed, Treasury Yields, Trump Woes

By:
James Hyerczyk
Updated: Jul 23, 2017, 19:17 UTC

The Dollar/Yen closed lower last week in continuation of the selling that began the previous week. If you recall, that weakness was fueled by dovish

Japanese Yen

The Dollar/Yen closed lower last week in continuation of the selling that began the previous week. If you recall, that weakness was fueled by dovish comments from Fed Chair Janet Yellen and disappointing U.S. Consumer Inflation and Retail Sales data. This news was strong enough to reduce the chances of a third Fed rate hike this year, making the U.S. Dollar a less-attractive investment.

For the week, the USD/JPY settled at 111.117, down 1.396 or -1.24%.

The U.S. Dollar was also hammered by events out of Australia and the Euro Zone. Gold was also underpinned by weaker U.S. Treasury yields which led to a tightening of the spread between U.S. Government Bonds and Japanese Government Bonds (JGB’s). Gold was also supported by concerns over the Trump administration’s involvement with the Russians and the election, and the Republican Senate’s inability to pass healthcare reform.

The first wave of selling against the Dollar and initial rise in gold was fueled by a sharp rise in the Australian Dollar. It rose to a multi-year high after the minutes of the July 4 meeting of the Reserve Bank of Australia hinted at a possible sooner-than-expected rate hike.

The second wave of selling against the Dollar and the next surge in gold prices was triggered after European Central Bank President Mario Draghi said the central bank would begin discussing tapering its stimulus in September. The Euro rallied to a multi-year high on the news and the ECB said nothing to stop the rise.

USDJPY
Weekly USDJPY

Forecast

The focus this week will shift to the U.S. The key events that are likely to control the direction of the USD/JPY this week will be the U.S. Federal Reserve’s interest rate decision and monetary policy statement on Wednesday, U.S. Durable Goods on Thursday and Advance GDP on Friday.

The Federal Open Market Committee is widely expected to leave interest rates unchanged at<1.25%. However, investors will be looking for clues in its monetary policy statement as to the timing of the next interest rate hike.

A dovish Fed is likely to drive the USD/JPY lower. A hawkish Fed will be a surprise, but Dollar/Yen traders may not believe them so I’m not sure how Forex pair will react will react, but I don’t think there will be a major rally.

Core Durable Goods are expected to show a 0.4% increase, up slightly from the previous 0.3%. Advance GDP is expected to come in at 2.5%, up from the previous 1.4%.

The direction of U.S. Treasury yields will continue to influence the direction of the Dollar/Yen. Falling yields will tighten the spread between U.S. Government Bonds and JGB’s. This will be bearish for the U.S. Dollar.

Finally, last week, officials increased the scope of the investigation regarding the Trump campaign’s involvement with the Russians in influencing last November’s elections. Additionally, Republican senators canceled plans to repeal Obamacare and replace it with their own healthcare plan. The inability to pass this key piece of legislation raises doubts about the Trump administration’s ability to pass tax reform and infrastructure spending bills.

These issues are likely to continue to be a drag on the U.S. Dollar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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