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USD/JPY Weakness to Subside on Hawkish Fed Forward-Guidance

USD/JPY Weakness to Subside on Hawkish Fed Forward-Guidance

Fundamental Forecast for Japanese Yen: Bearish

Japanese Yen Talking Points

USD/JPY is back under pressure as the U.S. Gross Domestic Product (GDP) report instills a mixed outlook for the real economy, and the recent developments in the exchange rate warns of a broader shift in dollar-yen behavior as both price and the Relative Strength Index (RSI) snap the bullish trends from earlier this year.

Even though the Federal Open Market Committee (FOMC) is widely expected to retain the current policy on August 1, the latest comments from Chairman Jerome Powell & Co. suggest the central bank has no intention of abandoning its hiking-cycle as ‘the FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate.’

The updates to the GDP figures should keep the FOMC on track to implement higher borrowing-costs as ‘recent data suggest that growth of household spending has picked up,’ and Fed officials may continue to alter the forward-guidance for monetary policy as ‘participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020.’

In turn, Fed Fund Futures may continue to reflect growing expectations for four rate-hikes in 2018, with market participants now looking for a policy adjustment at each of the quarterly meetings in September and December, and fresh comments from Chairman Powell & Co. may heighten the appeal of the greenback should the central bank prepare U.S. households and businesses for an imminent rate-hike.

Keep in mind, the reaction to U.S. President Donald Trump raises the risk for a larger pullback as USD/JPY fails to test of the December-high (113.75), and recent price action warns of a broader shift in dollar-yen behavior as both price and the Relative Strength Index (RSI) snap the bullish trends from earlier this year.

USD/JPY Daily Chart

USD/JPY stands at risk of exhibiting a more bearish as the upward trends unravel, with the string of closing prices below the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) region keeping the monthly-low (110.28) on the radar. The next region of interest coming in around 109.40 (50% retracement) to 110.00 (78.6% expansion) followed by the Fibonacci overlap around 108.30 (61.8% retracement) to 108.40 (100% expansion), which sits just above the May-low (108.11).

For more in-depth analysis, check out the Q3 Forecast for Japanese Yen

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.