USD/JPY Fundamental Forecast – April 28, 2017

The Dollar/Yen continues to be underpinned by investor demand for higher yielding assets. The rally started this week after favorable results from the French presidential election. Throughout the week prices consolidated as investors awaited President Trump’s long awaited tax reform plan. Apparently easing tensions over North Korea may have also attributed to its strength.

As we approach the end of the week, it looks as if the government is going to avoid a shutdown. If the budget extension bill is passed then this is also likely to be supportive for the USD/JPY.

In other news, the Bank of Japan kept its stimulus policies unchanged while lowering its inflation forecast, emphasizing that any exit from its unprecedented monetary easing remains in a distance.

The BOJ also said it would continue to use its two policy rates and asset purchases to spur prices higher. Additionally, the BOJ made a small increase to its growth forecasts for this fiscal year and next.

Global demand is currently supporting exports and contributing to only modest economic growth. Last week, BOJ Governor Haruhiko Kuroda said last week that the accommodative policy and asset purchases will continue for some time because inflation is “quite sluggish,” underscoring how far the BOJ lags behind its counterparts in the U.S. and Europe.

In its quarterly outlook report, the BOJ cut its inflation projection for the fiscal year that started this month to 1.4 percent from 1.5 percent. The central bank also continued to say it will hit the price target around the fiscal year starting next April, indicating its broad scenario hasn’t changed from three months ago.

The Japanese economy is expected to continue to improve, which makes me think the BOJ will raise rates instead of lowering them sometime in futures. However, with the U.S. Federal Reserve in a tightening mode, the interest rate differential should continue to favor the U.S. Dollar.

All bets will be off about the next major move being a rate hike, however, due to geopolitical risks. Growing concerns over North Korea could drag down the financial markets, consequently flight-to-safety buying could support the Japanese Yen. This may force the central bank to continue implementing easing measures.

Forecast

Today’s price action is likely to be determined by the slew of U.S. government data. This data includes Advance GDP, the Employment Cost Index, Chicago PMI and Consumer Sentiment.

Advance GDP is expected to come in at 1.3%. This is down from 2.1%. The employment cost index is the next major report to watch because this report includes data on wages so it could be considered an indicator of inflation. It is expected to rise 0.8%, up from the previous 0.5%.