USD/JPY Fundamental Weekly Forecast -Supported by Rising Treasury Yields, Soaring Equity Prices

The inability to break through a key support area combined with rising U.S. interest rates and huge demand for high-yielding assets helped drive the Dollar/Yen sharply higher last week.

The USD/JPY finished the week at 112.162, up 0.676 or +0.61%.

Treasury yields were boosted early in the week during the testimonies of Fed Chair nominee Jerome Powell and current Fed Chair Janet Yellen. Both hinted that the Fed was ready to raise interest rates. This news helped widen the spread between U.S. Government Bonds and Japanese Government Bonds, making the U.S. Dollar a more attractive investment.

During his Senate confirmation hearing on November 28, Powell did not commit definitively to a December rate hike, but strongly hinted that the likelihood is growing. In doing so, he also indicated that markets can expect more of the same from Fed leadership, even though there will be a new person in the chair position.

“The case for raising interest rates at our next meeting is coming together,” Powell told the Senate Banking Committee. “I think the conditions are supportive of doing that.”

On November 29 Fed Chair Yellen supported the U.S. Dollar when she said the central bank is concerned with letting growth get out of hand so is committed to continuing to raise rates in a gradual manner. Yellen did not specifically commit to a December rate hike, but indicated that her views have not changed with her desire for the central bank to continue normalizing policy.

The Japanese Yen was also pressured mid-week when the Senate moved to start debate on the Republican tax bill. Dollar/Yen traders primary ignored the news that North Korea launched another ballistic missile and that the tax reform bill had stalled on Thursday.

The safe haven Japanese Yen did respond negatively on Friday to reports Michael Flynn may implicate President Donald Trump in the Mueller Russian investigation but this was only because U.S. stock markets plunged on the news.

Forecast

Rising U.S. Treasury yields and soaring equity prices are likely to continue to underpin the USD/JPY this week.

Early this week, we’ll be looking for a reaction to the news over the week-end that Senate Republicans cleared another hurdle towards tax reform. There is expected to be some debate because of differences in the Senate and House versions of the bill. This could cause volatility if it leads to further delays.

The Russian probe investigation will also be a factor that could cause surprises and increased volatility.

North Korea is still an issue, but last week’s reaction to another ballistic test by the rogue nation suggests it is going to take military action to get a realistic reaction from the financial markets.

There are no major reports this week from Japan. The key minor report is quarterly Final GDP on Friday.

In the U.S., the focus will be on ISM Non-Manufacturing PMI, Weekly Unemployment Claims and the November Non-Farm Payrolls report.