USD/JPY Fundamental Weekly Forecast – Tax Reform Delay Likely to Lead to Fewer Fed Rate Hikes in 2018

After posting a strong gain the previous week, the Dollar/Yen was poised to surge to the upside last week if enough buyers came in to drive the Forex pair through the recent top at 114.443. The breakout took place on Monday, but the buying dried up at 114.728 after uncertainty around tax plan progress began to surface and the Treasury bond market started flashing a warning sign about a recession. Buyers never regained control and the Dollar/Yen closed lower for the week.

The USD/JPY settled at 113.513, down 0.519 or -0.46%.

The U.S. Dollar weakened against its Japanese counterpart last week after U.S. House of Representatives Speaker Paul Ryan left the door open to a possible delay in implementing a huge corporate tax cut, following a media report that his fellow Republicans in the Senate are exploring the option.

Ryan explained the reasoning behind the possible delay saying, “So what economists tell us … is that you still get very fast economic growth and you actually are encouraging companies to spend on factories and plants and equipment and hiring people sooner with the phase-in.”

In other news, according to Reuters, the Bank of Japan’s nine-member board debated calls from one of its policymakers to target the longer end of the yield curve at a rate review in October, a summary of their opinions showed, with several stressing that the current stimulus was sufficient.

Additionally, one board member said the BOJ should pledge to guide the 15-year government bond yield lower than 0.2 percent, instead of aiming to guide the 10-year yield around zero percent.

Forecast

We could know early in the week how investors feel about the Dollar/Yen relationship. This is because last week’s downside technical momentum has put the Forex pair in a position to take out a key bottom at 112.950. Overtaking this level could create the momentum needed to eventually challenge the next major support at 111.646.

In order to get investors excited about the upside again, the tax reform issue will have to go away. The lack of clarity or any uncertainty over the implementation of the plan will continue to weigh on the USD/JPY.

The market has already priced in the December interest rate hike so investors are focusing on the frequency of future rate hikes. Tax reform delay may lead to the Fed cutting its economic forecasts for 2018 and 2019 and this may mean fewer rate hikes. This will be bearish for the U.S. Dollar.

This week, there is a slew of economic data from Japan including reports on Producer Inflation, Revised Industrial Production and Preliminary GDP. This report is expected to show the economy grew by 0.4%. The previous report may be revised downward to 0.6%.

Bank of Japan Governor Kuroda is also scheduled to speak on Tuesday.

This week’s price action is likely to continue to be influenced by the direction of U.S. Treasury yields, the U.S. Dollar and the U.S. stock market. The Japanese Yen could surge if all come in weaker.

Traders will also get the opportunity to react to the latest economic data on Producer Inflation, Consumer Inflation, Retail Sales and Building Permits. Fed Chair Janet Yellen is also expected to speak on Tuesday.

Despite the number of reports and speeches, the key market driving force will be the tax reform issue. This could influence the market until the end of the year.