USD/JPY Fundamental Weekly Forecast – Holiday-Shortened Week Likely to Limit Volume, Trading Range

The Dollar/Yen closed lower last week. The selling was driven by a decline in U.S. Treasury yields. This helped tighten the spread between U.S. Bond yields and Japanese Government Bonds making the Japanese Yen a more attractive investment.

The USD/JPY settled at 112.058, down 1.455 or -1.28%.

Although a Fed rate hike in December is pretty much a done deal, there is still some uncertainty over the number of rate hikes in 2018. This is being driven by concerns over U.S. tax reform. Investors are worried about delays in overhauling the U.S. tax code. Additionally, investors are concerned that the Senate bill, if approved, will delay corporate rate hikes until 2019.

A delay in the corporate tax cuts or a delay in getting tax reform passed into law may limit the Fed’s outlook for economic growth, forcing it to limit the number of potential rate hikes. This could pressure the U.S. Dollar.

It could also hurt corporate profits which may be one reason stocks weakened for a second week. A couple of sharp sell-offs in the equity markets last week drove investors into the safety of the Japanese Yen.

In other news, U.S. producer and consumer inflation came in strong enough to support a December rate hike. Additionally, several Federal Open Market Committee members also came out in support of a rate hike next month.

BOJ Governor Haruhiko Kuroda said last week that inflation expectations in Japan are picking up slightly. He also said the BOJ will continue with its strong accommodative policy.

Finally, the Dollar/Yen was also pressured by a report on November 16 that Special Counsel Robert Mueller’s investigators probing possible Russian interference in the 2016 U.S. election had subpoenaed Trump’s election campaign for documents.

Forecast

This week will be shortened because of the U.S. Thanksgiving holiday on Thursday. This likely means there will be a general tapering off of volume throughout the week. Often, the Wednesday before Thanksgiving and the Friday afterwards feature the lowest volume of the year. This can, however, lead to meaningless volatile price swings due to the absence of major banks.

The holiday-shortened week in Washington likely means there won’t be any activity involving tax reform with the U.S. Senate likely to pick up the issue when it returns to the Capital next week.

In other news, traders will get the opportunity to react to a speech by Fed Chair Janet Yellen on Tuesday. On Wednesday, the U.S. reports on Core Durable Goods. The report is expected to show an increase of 0.4%. The Federal Open Market Committee will release its meeting minutes at 1900 GMT.

The minutes are expected to provide insight into the Fed’s plans to raise rates in December which the market feels is a done deal.

Uncertainty over tax reform is likely to continue to keep a lid on USD/JPY prices next week. Weaker stocks and lower Treasury yields will also weigh on prices.