USD/JPY Fundamental Forecast – April 27, 2017

The Dollar/Yen rallied to its highest level since March 31 on Wednesday, taking out the last main top at 111.576 in the process. However, profit-taking and position-squaring ahead of today’s Bank of Japan monetary policy meeting and a series of decisions, pressured the Forex pair into the close. Tuesday’s rally to 111.777 also fell short of the March 31 top at 112.194.

The USD/JPY closed the session at 111.050, down 0.030 or -0.03%.

Early in the session, the USD/JPY was supported by increased demand for higher risk assets. U.S. stocks were up in reaction to strong earnings reports from several key companies and in anticipation of the release of the long-awaited tax plan from President Trump.

After the release of the tax plan, it became a “buy the rumor, sell the fact” situation and stocks retreated, dragging down the Dollar/Yen in the process. Traders said Trump’s tax plan was somewhat of a disappointment, offering no fresh surprises.

Forecast

Early in the session, the USD/JPY is trading higher ahead of the BOJ news. There was no follow-through to the downside after Wednesday’s technical reversal top. This may be an indication that investors have already discounted the tax plan and are shifting their focus back to earnings reports.

Traders may be anticipating a big day in U.S. equity markets with several major companies reporting before the opening, and several tech giants like Amazon.com, Alphabet, Microsoft and Intel reporting after the close.

The Bank of Japan is widely expected to stand pat when it announces the outcome of its policy-setting meeting later on Thursday. Some analysts are even saying the BOJ might lower its inflation forecast.

Analysts at Nomura are saying, “The yen depreciation seen since the first round of the French election has been a relief for the BOJ and we expect it to stay on the side-lines.”

It further added, “The BOJ policy framework could still benefit from any external tailwind, but for the time being, the bank needs to be patient before the wind shifts further.”

There may be a key change in the language of the BOJ statement. It may lower its fiscal 2017 inflation forecast to 1.3 percent from January’s forecast of 1.5 percent, but with the forecast already more optimistic than trader consensus, I don’t expect the change would spur expectations for more policy easing.

I don’t expect to see much movement from the USD/JPY when the BOJ releases its interest rate decision and monetary policy statement. The bulk of the price action today will be dictated by the movement in the U.S. stock indices.

If the early earnings reports are bullish then we should see a “risk-on” session which should send the USD/JPY higher.