USD/JPY Fundamental Weekly Forecast – Higher Rates Supportive, but Stock Market Weakness Will Limit Gains – FX Empire

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The Dollar/Yen rallied to its highest level since May 17 after hawkish talk from central bankers drove up global and U.S. interest rates, widening the interest rate differential between U.S. Treasury Bonds and Japanese Government Bonds. This made the U.S. Dollar a move attractive investment.

The USD/JPY settled the week at 112.360, up 1.105 or +0.99%.

While talk of rising rates may have driven up the Dollar/Yen, concerns over the direction of the U.S. stock market helped limit gains and on Thursday even fueled a steep sell-off by the Forex pair.

Although the USD/JPY closed higher, we actually had a two-sided trade so we’ll look at the reasons for the rally and the reasons for the sell-off.

Helping to underpin the USD/JPY were hawkish comments from European Central Bank President Mario Draghi, Bank of England Governor Mark Carney and Bank of England Governor Stephen Poloz. Their comments triggered a wave of selling in the global bond market as yields rose sharply as investors adjusted their positions to price in future rate hikes.

FOMC Member Robert Harker and Fed Chair Janet Yellen also contributed to a rise in U.S. Treasury yields, which helped make the U.S. Dollar a more attractive investment.

The USD/JPY sold-off sharply after reaching 112.922 on Thursday, June 29 after a steep sell-off in the U.S. equity markets. Stocks sold off sharply last week as investors continued to exit technology stocks and in reaction to a delay in the vote to reform U.S. healthcare and repeal Obamacare.



Simple analysis says that the USD/JPY will continue to strengthen as long as U.S. Treasury yields continue to rise. This scenario will be supported by better-than-expected U.S. economic data. The key reports to watch this week include the ISM Manufacturing PMI, ISM Non-Manufacturing PMI, the Fed Meeting Minutes and the U.S. Non-Farm Payrolls report.

Strict fundamental investors will follow the reports. Traders, however, will react to the news. Although the reports are likely to support a higher USD/JPY, especially since the Fed is set on raising rates, investors have to be prepared for the possibility of external events that could derail any rally. These include a failure by the Senate to pass healthcare reform and concerns over President Trump’s involvement with Russia to influence the election.