Fundamental Forecast for Yen:Neutral
- USD/JPY Risks Larger Pullback as Bull-Flag Formation Takes Shape
- USD/JPY Pulling Back from Former Support Line
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The long-term outlook for USD/JPY remains bullish as the Federal Reserve remains on course to remove the zero-interest rate policy (ZIRP), but the key developments coming out of Japan may produce a larger correction in the exchange rate should the Bank of Japan (BoJ) continue to endorse a wait-and-see approach at the November 19 interest rate decision.
Despite forecasts for a widening trade deficit in Japan, the region’s 3Q Gross Domestic Product (GDP) report may encourage the BoJ to carry its current policy into 2016 amid expectations for an upward revision in the growth rate. As a result, signs of a stronger recovery may prompt BoJ to keep its asset-purchase program JPY 80T, and Governor Haruhiko Kuroda may continue to highlight an upbeat outlook for the world’s third-largest economy as the central bank head remains confident in achieve the 2% inflation goal over the policy horizon.
Nevertheless, the major data prints coming out of the U.S. may fuel expectations for a December Fed rate-hike as the Consumer Price Index (CPI) is expected to show a rebound in the headline reading for inflation, while the core rate is anticipated to expand an annualized 1.9% for the second-consecutive month in October. Sticky price growth may generate a growing dissent within the Federal Open Market Committee (FOMC) as Chair Janet Yellen sees the central bank on course to meet its dual mandate for full-employment and price-stability, but an unexpected slowdown in consumer price growth may undermine bets for a 2015 liftoff amid the ongoing 9-1 split within the central bank.
In turn, the fundamental developments coming out US/Japan are likely to spark increased volatility in USD/JPY as market participants gauge the next move by the Fed/BoJ, but the pair may consolidate ahead of the major event risk as it appears to be stuck within a bull-flag formation. Nevertheless, the deviating paths for monetary policy accompanied by the continuation pattern in price continues to highlight a long-term bullish outlook for the dollar-yen especially as the pair breaks out of the range carried over from back in September.