USD/JPY Fundamental Daily Forecast – U.S. Producer Inflation Data Could Set the Tone Today

The Dollar/Yen rallied on Monday, helped by higher U.S. Treasury yields. Buyers overcame early weakness fueled by upbeat comments from Bank of Japan Governor Haruhiko Kuroda.

The USD/JPY settled at 113.619, up 0.106 or 0.09%.

The yield on two-year U.S. Treasury notes reached a nine-year high on Monday, as the yield curve resumed its flattening and investors priced in a 25-basis-point interest rate hike by the Federal Reserve next month.

The 10-year Treasury yield rose to 2.407 percent from its U.S. close on Monday of 2.400 percent. It was at 2.304 percent as early as November 8.

Bank of Japan Governor Haruhiko Kuroda said Monday that the central bank will continue its monetary-easing efforts to ensure that it meets its 2% inflation target.

Late in the session, the federal government released a report that showed it began its new budget year with an October deficit of $63.2 billion, up sharply from a year ago. This was larger than the $58.2 billion forecast. The size of the deficit may have been a surprise, but the deficit wasn’t since the government has run deficits in October for each of the past 64 years.

The Treasury Department reported that the October deficit was 37.9 percent higher than the $45.8 billion deficit recorded in October 2016.

Forecast

The USD/JPY is trading higher early Tuesday. The divergence between the monetary policy of the U.S. Federal Reserve and the Bank of Japan should continue to be supportive for the Forex pair.

The Forex pair could weaken if stocks continue to sell-off in reaction to a possible delay in U.S. tax reform. This news would encourage investors to sell risky assets and move their money into the safe haven Japanese Yen.

Currently, the chart pattern suggests bullish investors are trying to build a support base. The longer the support base, the greater the odds the next rally will be strong enough to take out last week’s high at 114.728. A trade through 112.950 will change the trend to down and likely lead to an acceleration to the downside.

Early Tuesday, FOMC Member Charles Evans speaks. Shortly afterwards, pre-market investors will get the opportunity to react to a speech from Fed Chair Janet Yellen. Investors are hoping they’ll shed some light on the direction of interest rates and inflation.

At 1000 GMT, the NFIB Small Business Index is expected to rise to 104.2 from 103.0.

The major report is at 1330 GMT. Government data on Producer Inflation is expected to show a rise of 0.1%. Last month’s read was 0.4%. Core PPI is expected to come in at 0.2%, down from the previously reported 0.4%.