USD/JPY Fundamental Daily Forecast – Is “Risk Off” Tone Over Brexit Driving Investors into Safe-Haven Japenese Yen?

The Dollar/Yen is trading lower early Tuesday as investors square positions ahead of the start of the U.S. Federal Reserve’s two-day policy meeting. We could also be seeing safe-haven buying in reaction to rising worries Boris Johnson, the front-runner to replace UK Prime Minister Theresa May, could put Britain on a path towards a dreaded no-deal Brexit. Investors could also be adjusting positions ahead of Thursday’s Bank of Japan interest rate decision and monetary policy statement.

At 05:21 GMT, the USD/JPY is trading 108.290, down 0.242 or -0.22%.

U.S. Treasury yields are down slightly, shares in Asia are mostly higher and U.S. futures markets are drifting lower. These moves are offsetting so the early weakness is likely being fueled by investors looking for protection.

Fed Meeting

The Fed will begin its two-day policy meeting on Tuesday with its policy decision and public comments on Wednesday. Investors are looking for the U.S. central bank to hold its overnight lending rate steady, while opening the door for a July rate cut.

Investors are making these calls based on lackluster inflation, modest economic growth expectations and a partial inversion of the yield curve. All of these factors have been putting pressure on Fed Chair Powell and the Federal Open Market Committee to move toward reducing borrowing costs.

The issue for investors is the timing of the Fed’s first rate cut in ten years. Some investors still believe the Fed could cut in June with other calling for July. Still other have determined that September is likely the best time for the reduction.

Bank of Japan

The Bank of Japan (BOJ) is expected to leave interest rates at ultra-low levels, while maintaining its massive stimulus program on Thursday. It is also expected to signal its readiness to ramp up monetary support if growing risks such as the escalating US-China trade war threaten the economy’s modest expansion.

If the Fed cuts at its June meeting then the U.S. Dollar could weaken. This could spike the Japanese Yen higher, which would hurt Japan’s export-reliant economy. Therefore, there are some who believe the BOJ may be forced to cut rates to match the Fed’s move.

Safe-Haven Buying Due to Brexit Worries?

According to Reuters, worries about Brexit are hitting the British Pound and this could be creating a generally “risk-off” tone, sending investors into the safe-haven Japanese Yen. The markets are being rattled by the news from Monday that one of his former rivals and EU supporter Matt Hancock threw his support to former foreign minister Boris Johnson.

Johnson, who is known as the face of the official campaign to leave the European Union, has promised to lead the United Kingdom out of the EU with or without a deal.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.