USD/JPY Fundamental Forecast – March 21, 2017

The U.S. Dollar was on the defensive against the Japanese Yen on Monday, after several Fed speakers reinforced the perception that the U.S. central bank won’t accelerate the pace of it interest rate hikes.

The USD/JPY closed the session at 112.561, down 0.055 or -0.05%.

The Fed raised its benchmark interest rate last week and said that its future course of hikes would be “gradual”. This news pushed down U.S. Treasury yields, making the U.S. Dollar a less-desirable investment. It also helped narrow the interest rate differential between U.S. Treasury Bonds and Japanese Government Bonds.

According to Chicago Fed President Charles Evans, the central bank will wait until June to decide on the next rate hike.

“June is a time where we will obviously have two meetings to access how financial markets have evolved, everything happening in Washington and the likelihood of that, and the data evolving [including] whether or not prices are going up,” he said.

Last week’s lone dissenter on the Federal Reserve Monetary Policy Committee, Minneapolis Fed President Neel Kashkari said the voted against a rate hike last week because he wanted to see more inflation in the U.S.

Philly Fed President Patrick Harker said that it’s OK if inflation overshoots the Fed’s inflation target as the labor market tightens. “Obviously there’s a lag to inflation. We have to be careful not getting behind the curve,” said Harker.

Forecast

Over the near-term, the return of inflation and a range of uncertainties, including European elections and protectionism should be supportive for the Japanese Yen.

Traders expect to see a lot of stop-loss selling if the USD/JPY breaks under 112.00.

Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren will all speak later on Tuesday. Fed Chair Janet Yellen is scheduled to speak at a conference on Thursday.

On the upside, a series of retracement levels at 112.869, 113.139, 113.267 and 113.590 should be considered resistance.