The Dollar/Yen rose last week as buyers returned to the stock market, dampening the attraction of the Japanese Yen as a safe-haven asset. However, the biggest influence on the Forex pair was the diverging monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan.
While the Fed remains on track to raise interest rates, the Bank of Japan is widely expected to press on with its ultra-loose monetary policy because of low growth and inflation.
Additionally, the widening interest rate differential between the U.S. and Japanese Government bonds has made the U.S. Dollar a more attractive asset than the Japanese Yen, which is often used as a funding currency for carry trades.
The USD/JPY settled at 113.811, up 0.611 or +0.54%.
The Dollar/Yen plunged early Wednesday, impacted by the outcome of the U.S. elections. Since the mid-term elections came in as expected, there was no heightened market volatility so investors holding the dollar as a hedge, decided to liquidate positions. The sell-off was short-lived, however, as investors shifted their focus to the Fed.
The central bank’s Federal Open Market Committee (FOMC) kept interest rates unchanged, while maintaining the hawkish language seen in recent policy statements. The central bank as expected unanimously approved keeping the federal funds rate in a range of 2 percent to 2.25 percent.
The Fed also made a few tweaks to the way policymakers are viewing economic conditions. On the upside, the committee noted that the unemployment rate “has declined” since the September meeting. The Fed also reiterated its belief that “economic activity has been rising at a strong rate.”
On the downside, the Fed’s statement noted that the “growth of business fixed investment has moderated from its rapid pace earlier in the year.” The Fed also reiterated its belief that “economic activity has been rising at a strong rate.”
Fundamentally, a bullish tone was set by the Fed last week and this tone is likely to continue this week as long as Fed speakers and the economic data continue to support the central bank’s plan to raise rates in December.
On Wednesday, the U.S. will release its latest data on consumer inflation. The CPI is expected to come in at 0.3%. The Core CPI is forecast at 0.2%.
On Thursday, Core Retail Sales are expected to have risen 0.5% and Retail Sales are forecast to have risen 0.6%.
Fed Chairman Jerome Powell will deliver speeches on Wednesday at 2300 GMT and on Friday at 1630 GMT. In last September he made hawkish comments that many blame for setting of the steep decline in early October.
There are no major reports from Japan, but the key minor report is Preliminary GDP, due to be released early Wednesday. It is expected to come in at -0.3%, down from the previous quarter’s upwardly revised 0.7%. This news will solidify the Bank of Japan’s dovish tone, helping to sustain the upward bias of the USD/JPY.
Technically, if the upside momentum continues then look for buyers to make a run at the November 6, 2017 top at 114.728 and beyond.