USD/JPY Fundamental Forecast – January 19, 2017

After early session weakness on Wednesday, the Dollar/Yen rebounded late in the session to post a dramatic closing price reversal bottom. The rally was in response to a number of factors including technically oversold conditions following an eleven day break from 118.601 on January 3.

Position-squaring ahead of Trump’s inauguration also contributed to the rally. Solid U.S. inflation data helped increase the odds for a Fed rate hike as early as March. This was confirmed late in the day by hawkish comments from Fed Chair Janet Yellen.

The USD/JPY close 114.634, up 2.033 or +1.81%.

U.S. CPI rose 0.3%, in line with expectations. Annualized, consumer inflation was 2.1%. This put it above the Fed’s 2.0% mandate and marked the first time it was higher than this level since the summer of 2014.

Buyers increased upside pressure late in the session after Federal Reserve Chair Janet Yellen hinted at the possibility of several rate hikes in 2017.

Yellen said that rates were likely to rise “a few times a year” for the next couple of years.

“As of last month, I and most of my colleagues – the other members of the Fed board in Washington and the presidents of the 12 regional Federal Reserve banks – were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3 per cent,” she said in a speech.

Forecast

In the U.S. on Thursday, investors will get the opportunity to react to the latest data on Building Permits, Philadelphia Manufacturing, Weekly Unemployment Claims and Housing Starts.

I expect to see the momentum from Yellen’s hawkish comments to continue on Thursday. The daily chart indicates there is room to the upside with the next major upside target 115.580 to 116.293.