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USD/JPY Fundamental Weekly Forecast – Fed Speakers, Treasury Yields to Dictate Price Action

James Hyerczyk
USD/JPY traders should also pay attention to the Fed speakers this week. In June, Fed policymakers voted 9 to 1 to leave rates unchanged. St. Louis Fed President James Bullard voted for a rate cut. He has already said since then that 50-basis point rate cut is too excessive.

The Dollar/Yen closed lower last week after giving up nearly half of its two week gains in reaction to dovish remarks from Federal Reserve Chairman Jerome Powell that drove U.S. Treasurys a little lower. At the end of the week, investors were pricing in a 100% chance of a 25-basis point rate cut and only a 30% chance of a 50% basis point rate cut.

Last week, the USD/JPY settled at 107.900, down 0.574 or -0.53%.

Japan Domestic Data

There were no major reports out of Japan last week, and the minor reports didn’t offer anything encouraging about the economy. It really didn’t matter anyway since most investors were watching and reacting to the interest rate differential between U.S. Government bond yields and Japanese Government bond yields.

In Japan, the only positive was the Current Account, which came in at 1.31 Trillion, lower than the previously reported 1.60 Trillion, but better than the 1.24 Trillion forecast.

The lowlights were misses by Bank Lending, Core Machinery Orders, M2 Money Stock, Preliminary Machine Tool Orders, Producer Inflation, Tertiary Industry Activity and Revised Industrial Production.

Bank of Japan Governor Haruhiko Kuroda started the week by saying the country’s economy was expected to expand moderately as a trend and gradually push inflation toward the central bank’s 2% target.

“The BOJ will make necessary policy adjustments to sustain the economy’s momentum towards achieving its inflation target,” Kuroda said in a speech at a quarterly meeting of the central bank’s regional branch managers.

Dollar Weakens after Fed Policymakers Signal Rate Cut

On July 10, Fed Chief Jerome Powell, in prepared remarks for Congress, reaffirmed that the central bank is concerned about economic weakness and that it will act as “appropriate” to sustain the recovery – a signal to markets that a rate cut is coming soon.

“It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook,” Powell said in prepared remarks.

In the Minutes of the Fed’s June meeting released shortly after Powell’s testimony, policymakers underscored the Fed chief’s message, strengthening the case even further for a rate cut.

The majority of policy makers noted that the “economy had appeared to have lost some momentum” in recent weeks at their meeting, pointing to weaker business confidence, trade tensions and signs of slowing of global economic growth.

“Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook,” the minutes of the June meeting said. Additionally, several policy makers said a rate cut may be needed in the near future because it could “cushion the effects of possible future adverse shocks to the economy.”

Weekly Forecast

At this time, the chance of a 50-basis point rate cut on July 31 is about 30%. Hurting the chances of such a cut was better-than-expected U.S. consumer inflation data.

This week’s U.S. economic reports are likely to solidify the chances of “50bps cut or no 50bps cut”. They include Monday’s Empire State Manufacturing Index, Retail Sales and Building Permits.

USD/JPY traders should also pay attention to the Fed speakers this week. In June, Fed policymakers voted 9 to 1 to leave rates unchanged. St. Louis Fed President James Bullard voted for a rate cut. He has already said since then that 50-basis point rate cut is too excessive.

So I think the volatility in the USD/JPY this week will be fueled by the reports, but mostly by Fed members who could offer clues about the chances of a 25bps or 50bps rate cut. Dollar/Yen traders will also take direction from the direction of U.S. Treasury yields.

This article was originally posted on FX Empire

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