USD/JPY Fundamental Daily Forecast – Underpinned as US, China Near Completion of Phase One Trade Deal

It’s a sluggish start to the new week with the Dollar/Yen trading slightly better, while posting a tight range. The Forex pair is being underpinned by firmer U.S. Treasury yields and increased demand for risky assets. Volume is light because of a bank holiday in Japan. Meanwhile, U.S. investors continue to digest the impact of Friday’s Non-Farm Payrolls and ISM Manufacturing PMI reports. There’s also a light schedule in the United States with Factory Orders the only notable report.

At 06:52 GMT, the USD/JPY is trading 108.263, up 0.072 or +0.07%.

Last week, the Dollar/Yen was under pressure after the Federal Reserve cut rates on October 30 and left the door open to more if needed, however, it did indicate it would pause in December. Federal Reserve Chairman Jerome Powell also all but ruled out the risk of tightening, saying he wouldn’t consider a rate hike until inflation was “substantially” higher.

While the Fed was trimming its benchmark interest rate, the Bank of Japan (BOJ) was keeping its monetary policy steady on October 31. However, it did introduce new forward guidance to more clearly signal the future chance of a rate cut, underscoring its concern over simmering overseas risks.

“The BOJ expects short- and long-term interest rates to remain at present or lower levels as long as needed to pay close attention to the possibility that the momentum toward achieving its price target will be lost,” the central bank said in a statement.

On Friday, the USD/JPY was driven higher as investor sentiment rose in reaction to much stronger-than-expected U.S. jobs data. Other data released Friday included the ISM Manufacturing PMI report for October. The data showed a bigger-than-expected contraction in the sector. However, some of the survey’s internal components showed improvement, offsetting the disappointing headline number.

Daily Forecast

Today’s U.S. Factory Orders report is expected to come in at -0.5%. However, investors will be focused on the latest trade talk developments since they will have direct influences on the U.S. Dollar, Treasury yields and demand for risky assets.

The potentially bullish news is that China said on Friday it has reached a consensus with the U.S. in principle after a phone call among high-level trade negotiators last week.

The Chinese Ministry of Commerce said Vice Premier Liu He had a phone call with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Friday.  It said the two sides conducted “serious and constructive” discussions on “core” trade points and talked about arrangements for the next round of talks.

The White House said 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.”

Traders should look for the USD/JPY to move higher following the announcement of a partial trade deal between the two economic powerhouses, but gains are likely to be limited because the contentious issues on whether the US will cancel the planned December Tariffs remain an unknown.

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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.