Fundamental Forecast for Japanese Yen: Bearish
Japanese Yen Talking Points:
USD/JPY pulls back from the weekly-high (111.49) as Fed Chairman Jerome Powell sees ‘no clear’ threat for above-target inflation, and the U.S. data prints on tap for the week ahead may continue to drag on the exchange rate as updates to the Gross Domestic Product (GDP) report are anticipated to show a downward revision in the growth rate.
The U.S. economy is now expected to expand 4.0% in the second-quarter of 2018 versus an initial print of 4.1%, with signs of slowing activity likely to sap the appeal of the dollar as it dampens the Federal Open Market Committee’s (FOMC) scope to extend the hiking-cycle.
Keep in mind, Fed Fund Futures still reflect expectations for four Fed rate-hikes in 2018 as most members viewed ‘it would likely soon be appropriate to take another step in removing policy accommodation,’ and the committee may continue to prepare U.S. households and businesses for higher borrowing-costs as ‘many participants noted that it would likely be appropriate in the not-too-distant future to revise the Committee's characterization of the stance of monetary policy in its postmeeting statement.’
However, recent comments from Chairman Powell suggest the central bank is in no rush to alter the forward-guidance as ‘there does not seem to be an elevated risk of overheating,’ and Fed officials may continue to project a longer-run neutral rate of 2.75% to 3.00% at the next quarterly meeting in September as ‘further gradual increases in the target range for the federal funds rate will likely be appropriate.’
With that said, lackluster data prints coming out of the U.S. economy may undermine the recent rebound in USD/JPY, but recent developments surrounding the exchange rates brings the topside targets on the radar as it breaks out of the downward trending channel carried over from the previous month. The Relative Strength Index (RSI) highlights similar dynamic, with the developments raising the risk for a larger advance in the dollar-yen exchange rate as it carves a series of higher highs & lows. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!
USD/JPY Daily Chart
The failed attempts to break/close below the 109.40 (50% retracement) to 110.00 (78.6% expansion) region may spur a run at the monthly-high (112.15) as USD/JPY initiates a bullish sequence off of the August-low (109.77).
Need a closing price above the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) to open up the Fibonacci overlap around 112.40 (61.8% retracement) to 112.80 (38.2% expansion), which sits just below the 2018-high (113.18), with the next region of interest coming in around 113.80 (23.6% expansion) to 114.30 (23.6% expansion).
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.
