USD/JPY Fundamental Forecast – January 18, 2017

Safe-haven buying helped drive the Dollar/Yen lower on Tuesday along with negative comments from President-elect Donald Trump. Traders bought the Yen earlier in the session against expected political uncertainty over Brexit and a speech by U.K. Prime Minister Theresa May. However, Trump caused the most damage to the dollar when he said, “Our companies can’t compete with them (China) because our currency is too strong.”

The USD/JPY closed at 112.601, down 1.575 or -1.38%.

Risk aversion was the theme on Tuesday as stocks weakened also, triggering the carry trade where investors took money out of equities and bought Yen to pay back loans to Japanese banks.

In other news, San Francisco Federal Reserve Bank President John Williams called for gradual U.S. interest rate hikes over the next few years to keep the economy from overheating and ultimately falling into recession.

Fed Governor Lael Brainard, a noted dove, said the U.S. central bank might hike rates more aggressively if deficit spending under Trump produced a quick economic boost.

Forecast

The USD/JPY could remain under pressure leading into Trump’s inauguration on Friday. This is because investors are starting to doubt whether he can stimulate the economy in a timely manner with his plans to spend aggressively on infrastructure, cut taxes and relax regulations.

Traders believe his inauguration speech will attempt to revive confidence in his plans and this may trigger a recovery in the Dollar/Yen.

On Wednesday, investors will get the opportunity to react to a slew of U.S. economic data including consumer inflation, capacity utilization, industrial production and the Fed Beige Book. Fed Chair Janet Yellen is also scheduled to give a speech on monetary policy.

The consumer inflation report is most important. Monthly CPI is expected to rise 0.3%. This would put the annualized rate above 2.0% for the first time since the summer of 2014 at 2.1%.

We could see an intraday boost in the Dollar/Yen if the CPI number comes in higher than expected. This is because it will increase the odds of a Fed rate hike in March. Current data suggests the Fed will pass on a rate hike in January, having just hiked rates in December.

Look for early downside pressure on the USD/JPY, but don’t be surprised if there is a counter-trend rally in reaction to bullish CPI data. Of course, if the consumer inflation number misses then the dollar is likely to get hit hard.