USD/JPY Fundamental Forecast – March 29, 2017

The Dollar/Yen rose on Tuesday as investors increased demand for higher risk assets on the heels of positive U.S. economic data and on expectations for higher interest rates fueled by positive comments from a Fed official.

The USD/JPY closed at 111.125, up 0.462 or +0.42%.

Technical factors may have also played a role in the Forex pair’s rapid turnaround. This week’s low is 110.100. Buyers may have come in ahead of the major 50% level at 109.919. This was the half-way point of the so-called Trump Rally, or the move from the November bottom at 101.179 and the mid-December top at 118.658.

Early in the U.S. session on Tuesday, the USD/JPY posted a strong rally after the release of a key U.S. report reinforced rate hike expectations. According to the Conference Board, the U.S. consumer confidence index hit 125.6 in March, beating expectations for a reading of 114 and well above the February level of 116.1. This was its highest level since December 2000.

A stronger U.S. Dollar also pressured the Japanese Yen. It was bolstered by positive comments from U.S. Federal Reserve Vice Chairman Stanley Fischer. He said in an interview with CNBC that two more increases to U.S. overnight rates this year seemed “about right.”

Forecast

The USD/JPY could continue to rise on Wednesday as long as the economy continues to show signs of strength. This should continue to support the need for higher interest rates and consequently a stronger U.S. Dollar.

The Dollar/Yen could also be supported today if Speaker of the U.S. House of Representatives Paul Ryan and other Republicans show they are united in their support for tax cuts and fiscal spending.

Ryan has to find some way to prove to investors that the Trump administration’s plans to reform taxes won’t suffer the same fate as their attempt to reform Obamacare.

On Wednesday, investors will get the chance to react to a Fed speaker and Pending Home Sales.

FOMC Member Charles Evans is scheduled to speak. The Federal Reserve Bank of Chicago President could drive interest rates higher as well as the U.S. Dollar if he continues with his hawkish commentary. Earlier in the week, he said two interest-rate increases may be the right amount of tightening for the U.S. economy this year given uncertainty surrounding the outlook for inflation and government spending.

The direction of U.S. Treasury yields and demand for higher risk assets will determine the strength and direction of the USD/JPY today.