USD/JPY Fundamental Forecast – December 9, 2016

Firmer U.S. Treasury yields and greater demand for higher yielding assets helped underpin the Dollar/Yen on Thursday. The Forex pair is now within striking distance of last week’s short-term top at 114.820. Taking out this price with conviction and sustaining the rally could trigger the start of another prolonged move to the upside with the next target the January 29 main top at 121.678.

U.S. government debt prices fell on Thursday after the European Central Bank held interest rates steady. This helped boost yields while underpinning the U.S. Dollar.

The ECB also extended its quantitative easing program until December 2017, but will reduce purchases to 60 billion Euros per month from 80 billion Euros. This essentially means the central bank is tapering in a more dovish way.

In his news conference, ECB President Mario Draghi said “uncertainty prevails everywhere,” but added the risk of deflation has largely disappeared.

The uncertainty Draghi may be taking about is the upcoming elections in some of the largest economies in the Euro Zone and the U.K. plan to file Article 50 in March.

The USD/JPY finished the session at 114.024, up 0.273 or +0.24%.

Forecast

Yes, the Euro and the Yen are linked because they are both funding currencies. So I think it is important to understand what is happening with the Euro because most of the time it will have an impact on the strength and direction of the U.S. Dollar and demand for higher-yielding assets.

There are three reports from the U.S. on Friday. They are Preliminary University of Michigan Sentiment, Final Wholesale Inventories and Preliminary University of Michigan Inflation Expectations.

It don’t expect these reports to have any impact on the direction of the USD/JPY on Friday. Traders are going to continue to react to demand for higher risk assets and rising U.S. Treasury yields.

If there is any countertrend selling pressure then it will likely be related to position-squaring ahead of the week-end and Wednesday’s U.S. Federal Reserve interest rate announcement.