USD/JPY Fundamental Weekly Forecast – Fed Minutes Will Be Watched Closely

The Dollar/Yen sold off sharply last week as investors reacted to risk aversion and disappointing U.S. inflation data.

For the week, the USD/JPY settled at 109.153, down 1.511 or -1.37%.

Risk averse investors pulled money out of U.S. equity markets last week and placed the proceeds in the  safe-haven Japanese Yen. Technically, the move was related to the carry trade, whereby investors sell stock and pay back their Japanese bank loans in Yen.

A tightening of the interest rate differential between U.S. government bonds and Japanese government bonds also helped drive up demand for the Japanese Yen.

U.S. Treasury yields fell last week in reaction to safe haven buying and reduced odds of a Fed rate hike later this year. Treasury yields fell as investors bought bonds and notes for protection. Disappointing U.S. producer price and consumer price inflation also made the U.S. Dollar a less attractive investment.

Forecast

Investors are likely to continue to focus on the situation between the United States and North Korea. Last week, it was a war of words that raised worries in the financial markets. However, by the end of the week, traders were reacting to talk of diplomatic pressure from China and Russia.

The major reports that could move the USD/JPY this week are U.S. retail sales, building permits and the FOMC Meeting Minutes.

U.S. core retail sales are expected to show a 0.3% increase. Retail sales are expected to show a 0.4% increase. Building permits are expected to show a 1.25 million unit increase, slightly below the previous 1.28 million increase.

The FOMC Meeting Minutes is the report to be watched. Investors are hoping the minutes reveal more clues about the Fed’s plan to begin reducing its massive $4.5 trillion balance sheet. Investors will also be looking for clues as to the chances of a third rate hike later this year. Investors have all but eliminated the chances of a September rate hike, and the chances of a December rate hike fell below 50% after Friday’s CPI data.