USD/JPY Fundamental Daily Forecast – Trade Talk Optimism Catalyst Behind Rally

The Dollar/Yen is trading higher for a third session on Tuesday, boosted by rising U.S. Treasury yields and steady demand for risky assets. The Forex pair has also recaptured more than 61.8% of last week’s steep sell-off, an indication that perhaps buyers have returned to the market after absorbing last Wednesday’s interest rate cut by the U.S. Federal Reserve.

At 07:23 GMT, the USD/JPY is trading 108.791, up 0.212 or +0.20%.

Treasury Yields, Equities Rise

U.S. Treasury yields and equities are strengthening amid growing optimism in U.S.-China trade talks. Both moves are making the U.S. Dollar a more attractive investment while dampening demand for the safe-haven Japanese Yen.

The benchmark 10-year Treasury note, which moves inversely to price, was higher at around 1.786%, while the yield on the 30-year Treasury bond was also higher at around 2.275%.

In the U.S. stock market, the Dow Jones Industrial Average reached a milestone on Monday, joining the S&P 500 and NASDAQ Composite at record levels, as investor sentiment continued to be lifted by strong earnings and a rebound in economic data.

Additionally, a potential U.S.-China trade deal drove both assets higher. Continuing to underpin the markets were upbeat comments. On Friday, China said that it had reached a consensus with the U.S. in principle after a phone call among high-level trade negotiators last week. Meanwhile, the White House added in a statement Friday that the trade representatives “made progress in a variety of areas and are in the process of resolving outstanding issues. Discussions will continue at the deputy level.”

Adding to the upbeat investor sentiment, the U.S. Labor Department said Friday that American employers added 128,000 jobs in October, coming in well-above the 75,000 estimate.

Daily Forecast

Rising yields and demand for risk should continue to drive the USD/JPY higher on Tuesday, but their moves hinge on continued progress in the trade talks.

Although the current phase of the talks are moving smoothly, there is a potential problem brewing that could cause rates and stocks to stall, driving investors back into the safety of the Japanese Yen.

CNBC is reporting that China is pushing U.S. President Donald Trump to remove more tariffs imposed in September as part of a “phase one” U.S.-China trade deal, people familiar with the negotiations said on Monday.

A U.S. official said the fate of the December 15 tariffs is being considered as part of negotiations and a potential signing trip this month.

USD/JPY traders should watch for any developments regarding this matter since it could affect if or when a short-term deal is reached.

On the data front, investors will have the chance to react to one major U.S. report and several minor reports. The major report is ISM Non-Manufacturing PMI. It is expected to come in at 53.5, up from 52.6. The minor reports include Trade Balance, Final Services PMI, JOLTS Job Openings and IBD/TIPP Economic Optimism.

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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.