USD/JPY Fundamental Forecast – February 27, 2017

The Dollar/Yen closed the week on a weak note as investors priced in the possibility that interest rates would remained lower for a longer period of time than previously thought. This assessment was based on the Fed’s less-hawkish than expected minutes released last Wednesday and remarks from Treasury Secretary Steven Mnuchin, which suggested President Trump’s economic policies may be delayed until at least August.

The USD/JPY closed on Friday at 112.098, down 0.522 or -0.46%.

Essentially, investors pushed the Dollar/Yen to a two-week low on Friday as they cast doubt on the likelihood that President Trump will be able to move swiftly on his tax reform and fiscal spending plans. U.S. Treasury yields weakened on the news, making the dollar a less attractive investment.

Forecast

The direction of the USD/JPY is likely to be determined by trader reaction to Trump’s first major policy address to Congress on Tuesday. Therefore, we’re likely to see a counter-trend move on Monday as investors square positions ahead of his speech.

Trump is expected to reveal some details of his infrastructure spending and tax plans, but traders are not counting on seeing the same bullish reaction we’ve seen recently.

On Sunday, in a televised interview, Treasury Secretary Steven Mnuchin provided more details. He said that Trump will use the event to preview some elements of his sweeping plans to cut taxes for the middle class, simplify the tax system and make American companies more globally competitive with lower rates and changes to encourage U.S. manufacturing.

Traders will also have the opportunity to react to a slew of U.S. economic data including Durable Goods. Core Durable Goods are expected to rise 0.5% and Durable Goods Orders by 1.6%.

Minor reports include Pending Home Sales, which are expected to increase by 1.1%, down from the previous 1.6%.

Dallas Fed President Robert Kaplan is also expected to speak on Monday. He is considered a hawk so he may try to build a case for a March rate hike, which could help put a lid on gold prices. Recently, Kaplan revealed that the Fed should leave its options open to a rate hike in March.

He also said that the Fed should be tactical in taking opportunities to hike. Furthermore, he said Trump’s policies should focus on sustainable growth. Finally, he said that as the year unfolds, he does not want the Fed to get behind the curve.