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USD/JPY Fundamental Daily Forecast – Steep Plunge Under 106.963 Possible with 106.471 – 105.997 Target Zone

James Hyerczyk

The Dollar/Yen is trading lower on Thursday, shortly before the U.S. opening and the release of a slew of economic reports including the ISM Non-Manufacturing PMI report for September. Weaker-than-expected U.S. economic reports earlier in the week renewed fears over a U.S. recession, sending investors into the safety of the Japanese Yen.

At 10:37 GMT, the USD/JPY is trading 107.103, down 0.078 or -0.07%.

Falling U.S. Treasury yields and a plunge in global equity markets are also driving investors into the Japanese Yen.

The USD/JPY reached its high of the week on Tuesday when data showed a sharp decline in US factory activity. The selling continued on Wednesday after data showed hiring by U.S. private employers had slowed in September. Both reports indicate that the trade war between the United States and China is taking its toll on the U.S. economy.

The tightening of the spread between U.S. Government bond yields and Japanese Government bond yields is also making the Japanese Yen a more desirable asset.

The U.S. Dollar is being driven lower by the drop in Treasury yields. On Wednesday, Treasury yields fell as employment figures showed the U.S. economy is headed for a slowdown.

As of Wednesday’s close, traders were pricing in a 75% chance of a Fed rate cut at its October 29-30 policy meeting. This is up from 62% on Tuesday and about 20% last Friday. The Dollar/Yen could continue to weaken until traders have fully priced-in a 25-basis point rate cut.


Daily Forecast

Technically, the overnight sell-off stopped just above the last main bottom at 106.963. Taking out this level will signal a resumption of the downtrend after a more than month-long counter-trend rally. That rally was fueled by investors lowering the odds of a Fed rate cut at the end of October. Now that the Fed rate cut is back on the table, the USD/JPY is likely to weaken further.

The rally from August 26 at 104.463 to the first top at 108.478 on September 18 and the second top at 108.465 on October 1 created a 50% to 61.8% retracement zone at 106.471 to 105.997.

If 106.963 fails as support then look for a break into 106.471 to 105.997.

Fundamentally, today’s direction will be determined by trader reaction to several U.S. reports including Weekly Unemployment Claims, ISM Non-Manufacturing PMI and Factory Orders. Traders will also get the chance to react to a number of Fed speakers.

Weaker-than-expected data is likely to drive the USD/JPY lower.

Traders will also be taking direction from the movement in Treasury yields and especially demand for risky assets. Another steep drop in stocks should lead to a spike in demand for the Japanese Yen.

This article was originally posted on FX Empire