USD/JPY Fundamental Weekly Forecast – Conflict Resolution Supportive, but Retail Sales Will Set the Tone Today

The Dollar/Yen rallied on Monday, helped by rising U.S. Treasury yields and increased demand for higher risk assets as investors celebrated the slight easing of tensions between the United State and North Korea.

The U.S. Dollar also found support after one of the Fed’s most influential members said he expects to see the central bank raise interest rates once more this year, and to soon begin shedding some of the Fed’s bond holdings.

The USD/JPY settled the session at 109.644, up 0.491 or +0.45%.

Worries began to ease over the week-end after Secretary of State Rex Tillerson and U.S. Secretary of Defense James Mattis published a commentary piece in The Wall Street Journal stating that the current U.S. administration would continue to pursue diplomatic resolutions with North Korea. They said, “The U.S. has no interest in regime change or accelerated reunification of Korea.”

Investors returned to higher yielding assets on Monday on rumors of a Russia-China plan to diffuse the escalating conflict between the United States and North Korea. The two countries are hoping to get North Korea to stop its missile testing while asking South Korea and the U.S. to scale back its military exercises.

There were no major reports on Monday, but comments from New York Fed President William Dudley stirred the markets a little.

In an interview with the Associated Press, New York Fed President William Dudley, a close ally of Fed Chair Janet Yellen, said “It depends on how the economic forecast evolves. If it evolves in line with my expectations… I would be in favor of doing another rate hike later this year.”

He also praised the Trump administration for not “politicizing” the U.S. central bank’s decisions as some members of Congress have done in recent years.

Forecast

The USD/JPY is trading higher early Tuesday as investors continue to react to the easing of tensions between the United States and North Korea. The rally picked up steam when buyers regained the key 50% price level at 109.919.

Although money is leaving the safe haven Japanese Yen and flowing back into the stock market, gains could be limited because of concerns over the direction of U.S. interest rates.

The current rally represents investors trimming a portion of their positions related to last week’s flight-to-safety buying of the Japanese Yen. Investors are still holding positions related to whether the Fed raises interest rates later this year.

Despite the short-covering and position-squaring rally, we cannot ignore that there are still issues to be settled between the United States and North Korea. There is a report surfacing saying that North Korean leader Kim Jong Un received a report from his army on its plans to fire missiles towards Guam and said he will watch the actions of the United States for a while longer before making a decision, the North’s official news agency said on Tuesday.

If this report prompts a reaction from President Trump then flight-to-safety buying of the Japanese Yen will begin all over again.

The key area to watch today for USD/JPY investors is 110.453 to 110.863. So far, we’ve seen a normal retracement in a downtrend. Trader reaction to this zone will tell us if the buying is getting stronger, or if sellers are retaking control.

The key report today is U.S. Retail Sales. This is followed by minor reports such as the Empire State Manufacturing Index, Import Prices, Business Inventories and the NAHB Housing Market Index.

Core Retail Sales are expected to grow 0.3%. Retail Sales are also forecast at 0.3%. A stronger number will be bullish for the USD/JPY. A weaker number will reduce the chances of a Fed rate hike. This could be supportive for the Japanese Yen.