USD/JPY Fundamental Daily Forecast – Fed Bond Buying Decision Could Trigger Volatile Reaction in Dollar/Yen

The Dollar/Yen is trading lower early Wednesday, moving closer to the November 6 target at 103.177. Traders appear to be growing more optimistic over a new U.S. fiscal stimulus deal that will pressure the U.S. Dollar. Also weighing on the Forex pair are expectations of an extremely bearish U.S. Federal Reserve.

At 04:42 GMT, the USD/JPY is trading 103.499, down 0.142 or -0.14%.

The USD/JPY is moving down but holding slightly above its six-week low as investors looked past new restrictions to fight COVID-19 and focused on the likelihood of more U.S. stimulus that would weigh on the U.S. Dollar.

The dollar is being weakened by hopes that U.S. lawmakers can agree on a $1.4 trillion spending package.

A $908 billion bipartisan COVID-19 relief plan will be split into two packages, a person briefed on the matter said, raising hopes that at least a large part of the plan that already has bipartisan support will be approved.

The first plan calls for $748 billion in spending for programs likely by both Republicans and Democrats, including federal unemployment benefits and additional loans under the Paycheck Protection Program. A second $160 billion bill would include the more controversial areas of business liability protections and financial aid to state and local governments.

The U.S. Federal Reserve is expected to keep interest rates pinned near zero and to signal where rates are headed in the coming years at its final policy meeting of the year. The Fed’s policy statement is due at 1900 GMT.

Japan Economic News

Japan’s exports fell 4.2% in November from a year earlier, Ministry of Finance data showed on Wednesday, as the pain from the COVID-19 crisis continued.

That compared with a 0.5% rise expected by economists in a Reuters poll and followed a 0.2% fall in October.

Imports dropped 11.1%, versus the median estimate for a 10.5% decline.

The trade balance came to a surplus of 366.8 billion yen ($3.54 billion), against the median estimate of a 529.8 billion yen surplus.

Japan’s factory activity came within striking distance of stabilization in December, a private-sector survey showed on Wednesday, even as a resurgence in coronavirus cases is taking a toll on economies globally, particularly in Europe.

The slower decline in manufacturing will likely boost policymakers’ confidence that Japan’s export-oriented economy is able to pull through the crisis even as the services sector takes a heavy hit from a worsening flare-up in COVID-19 infections.

The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) rose to a seasonally adjusted 49.7 from a final 49.0 in November, shrinking at the slowest pace in 19 months.

Daily Forecast

Stimulus remains a key focus for investors. Market participants would like to see a deal sooner rather than later given the expectation for economic data to slow near-term. In the absence of a deal, volatility could pick up.

The bond market could have a volatile reaction depending on what the Fed signals about its bond program. This translates into interest rate volatility, which could trigger a turbulent reaction in the Dollar/Yen.

For a look at all of today’s economic events, check out our economic calendar.

Published by

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.