USD/JPY Fundamental Weekly Forecast – Treasury Yields, Stocks Will Control the Price Action

Higher U.S. interest rates helped drive the Dollar/Yen higher last week. Traders also reacted to the Bank of Japan’s interest rate decision and monetary policy statement.

The USD/JPY closed the week at 110.852, up 0.534 or +0.48%.

The U.S. Dollar was supported by the U.S. Federal Reserve’s decision to raise its benchmark interest rate 25-basis points and to set its target zone at 1.00 to 1.25 percent. The Fed also left open the possibility of additional rate hikes before the end of the year. The central bank also revealed its plan to unwind its $4.5 trillion balance sheet which is another form of tightening.

The Bank of Japan held monetary policy steady, pledging to keep asset purchases around the current target of 80 trillion Yen ($727 million) and sounding more upbeat on the economy.

“Private consumption has increased resilience against a background of steady improvement in the employment and income situation,” the BOJ said in a statement.

In economic news, U.S. Producer Prices came in flat as expected. Consumer Inflation, however, missed the estimate with a reading of -0.1%. Retail Sales also came in lower than expected at -0.3%. Building Permits also came in below expectations at 1.17 million units, missing the 1.25 million unit estimate. Housing Starts were also below the estimate at 1.09 million units. Finally, Consumer Sentiment dropped to 94.5. This was below the 97.2 forecast and the previously reported 97.1.

Forecast

There are no major reports this week, but several Fed members are on tap to deliver their opinions on the Fed rate hike and the strength of the economy. The market already knows how the Fed feels about future rate hikes so if any speakers deliver a dovish message, the USD/JPY is likely to weaken.

After the Fed meeting, Minneapolis Federal Reserve President Neel Kashkari saw the inflation numbers differently and he was not alone at the U.S. central bank in his view the Fed should have waited to raise interest rates until it was sure the recent drop in inflationary pressures really is temporary.

Kashkari was the lone policymaker to vote against the Fed’s decision to raise rates a quarter point. He said he voted against an interest-rate hike last week because he wasn’t convinced the recent spate of soft inflation readings was due to one-off factors.

Dallas Federal Reserve President Robert Kaplan may have voted in favor of the Fed rate hike, but he may have been a little uncomfortable with the decision. He said afterwards that he would want to see more evidence that inflation will rise toward the Fed’s 2-percent inflation goal before increasing rates again.

On Monday, investors will get the opportunity to react to comments from FOMC Member William Dudley and FOMC Member Charles Evans.

On Tuesday, FOMC Member Stanley Fischer is scheduled to speak in the morning. He is second in command at the Fed. Later in the session, Robert Kaplan delivers another speech.

Without any major economic reports this week, the direction of the USD/JPY will be determined by the movement in U.S. Treasury yields. Higher yields will be supportive for the dollar. Lower yields will help the Yen.

Demand for higher risk assets will also help the Dollar/Yen while a sell-off in the U.S. equity markets could drive investors into the safety of the Yen.