USD/JPY Fundamental Daily Forecast – U.S. Debt Ceiling News Taking Backseat to Draghi Comments

The Dollar/Yen rebounded after early session weakness to close higher on Wednesday. Given the recent weakness, the price action suggests the move was fueled by short-covering.

The USD/JPY closed at 109.231, up 0.429 or +0.39%.

The intraday rally started after President Trump said he had agreed to a three-month increase in the U.S. debt ceiling with congressional leaders. If passed by the Republican-led Congress, it would avert an unprecedented default on U.S. government debt, keep the government funded for the first three months of the fiscal year beginning October 1 and provide aid to victims of Hurricane Harvey.

U.S. Treasury yields rose on the news and Japanese Yen fell as safe-haven demand among investors worried about a short-term default subsided.

In other news, the U.S. Trade Balance came in at -43.7 billion. This was better than the expected 44.6 billion.

Final Services PMI came in slightly below expectations at 56.0. ISM Non-Manufacturing PMI was 55.3, below the 55.8 estimate and 53.9 previous read.

The Fed’s Beige Book reported that the U.S. economy expanded at a moderate pace through mid-August, but there were few signs of acceleration in inflation.

Forecast

The USD/JPY is trading lower on Thursday. There was no follow-through to the upside following yesterday’s strong rally.

Traders are saying that despite the dollar’s rally on Wednesday in response to Trump’s surprise deal with the Democrats on extending the debt limit, lingering concerns over North Korea related to tensions are likely to keep the pressure on the Dollar/Yen.

According to CNBC, Japan is the world’s largest net creditor nation, and at times of uncertainty traders assume Japanese repatriation from foreign countries will eclipse investors’ selling of Japanese assets. As a result, the Japanese Yen has continued to behave as a safe-haven currency despite Japan’s proximity to North Korea.

USD/JPY traders will also be monitoring the European Central Bank policy meeting and the subsequent press conference by ECB President Mario Draghi. Only 15 of 66 economists polled by Reuters said they expect the ECB to announce a reduction of its monthly asset purchases. Only a month ago, over half of respondents expected such a move. The primary focus will be on whether Draghi expresses any concerns about the Euro’s recent strength.

The dollar could strengthen against the Yen if the Euro tumbles. Ultimately, the direction of the USD/JPY will be determined by the direction of U.S. Treasury yields and the stock market. Rising rates and stocks in reaction to the debt ceiling news could trigger another recovery by the Dollar/Yen.