USD/JPY Fundamental Daily Forecast – Treading Water Ahead of Friday’s Jackson Hole Speeches

The Dollar/Yen fell on Wednesday, but is mounting a slight recovery early Thursday. Yesterday, the Forex pair was pressured by lower U.S. Treasury yields and a weaker U.S. Dollar. The catalysts behind the buying were Trump’s comments about shutting down the government and ending NAFTA, and the disappointing Flash Manufacturing PMI and New Home Sales reports.

The Japanese Yen was also supported by the carry trade as investors reacted to a weaker stock market.

On Wednesday, the USD/JPY settled at 109.026, down 0.522 or -0.48%. At 0940 GMT, the Forex pair is trading 109.339, up 0.312 or +0.29%.

U.S. Treasury yields fell and the U.S. dollar weakened on Wednesday as investors reduced exposure in higher-yielding assets after U.S. President Trump’s threat of a government shutdown and comments about the possible termination of a North American trade agreement.

In a speech In Phoenix, Arizona, late Tuesday, Trump warned he might terminate the NAFTA trade treaty with Mexico and Canada after a three-day conference failed to settle deep differences. He also stated that he may shut down the government if he does not get funding for a wall on the U.S. –Mexico border.

Trading conditions were thin as investors awaited speeches from Fed Chair Janet Yellen and European Central Bank President Mario Draghi on Friday in Jackson Hole, Wyoming. Therefore, the market may have over-reacted to Trump’s comments. No one can be certain whether Trump was trying to publicly negotiate changes to the current treaty, or if he was actually serious about ending NAFTA completely.

Forecast

In the U.S. on Thursday, investors will get the opportunity to react to the latest data on Weekly Unemployment Claims, Existing Home Sales and Mortgage Delinquencies. However, the primary focus remains on Friday’s speeches at the Jackson Hole central bankers’ summit by European Central Bank President Mario Draghi and Fed Chair Janet Yellen.

Draghi is expected to be downbeat and is not expected to talk about monetary policy, tapering or the direction of interest rates. He is going to try to steer clear of any comments that could move the Euro higher.

Yellen is also not expected to talk about a potential interest rate hike later this year. She feels that everything that needs to be known has been revealed in the latest Fed minutes and in subsequent speeches by FOMC members. If she does talk about monetary policy, the topic will be the Fed’s plan to begin trimming its massive balance sheet. She’ll probably say the process will begin after the Fed meeting in September. Yellen may also offer some new details about the process.