USD/JPY Fundamental Weekly Forecast – Looking for Initial Upside Spike in Reaction to Trade Talk Decision

I expect the initial reaction to the news to be bullish for the Dollar/Yen. I’m expecting firm U.S. Treasury yields which should drive up demand for the U.S. Dollar. Demand for risky assets should also be stronger. · FX Empire

James Hyerczyk

Sun, Jun 30, 2019, 6:35 AM

The Dollar/Yen closed higher last week as oversold technical conditions, combined with a shift in investor sentiment led to aggressive short-covering. The counter-trend buying was strong enough to produce a potentially bullish technical closing price reversal top. The chart pattern does not mean the trend is changing to up, but it could lead to a 2 to 3 week counter-trend rally.

Last week, the USD/JPY settled at 107.929, up 0.619 or +0.58%.

The shift in sentiment was fueled by an easing of tensions in the Middle East, dovish comments from Federal Reserve officials, and mixed feeling about the outcome of the meeting between President Trump and Chinese President Xi Jinping at the G-20 meeting.

Speculative safe-haven buyers let up on the long-side of the Japanese Yen early in the week after reports that the U.S. was seeking to negotiate with Iran over nuclear weapons and skirmishes in the Middle East it had been behind.

There was even a bigger short-covering rally in the USD/JPY on June 25 after Federal Reserve Chairman Jerome Powell and St. Louis Federal Reserve President James Bullard dampened hopes by some investors that Fed policymakers would deliver a half-point interest rate cut in July.

Powell reiterated his comments from the previous week after the Fed’s June interest rate decision and release of its monetary policy statement, saying that while there is greater uncertainty about trade and worries about the global economy, policymakers don’t know how long this may last or how serious the drag might be. Traders read this to mean that Powell was not endorsing the 50 basis point rate cut that the markets had been pricing in.

“The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” Powell said in brief remarks ahead of a moderated discussion at the Council on Foreign Relations in New York.

Bullard, who was the lone dissenter from the Fed decision to hold rates steady at its June meeting, reiterated that he though a quarter-point rate cut would be a wise “insurance” move. However, he also didn’t endorse a half-point rate cut.

“I think 50 basis points would be overdone,” Bullard said on Bloomberg Television.

Weekly Forecast

In a move that should have a major impact on USD/JPY on Monday, U.S. President Donald Trump and Chinese President Xi Jinping agreed on Saturday at their meeting at the G-20 summit in Osaka, Japan, to proceed with trade negotiations.

For nearly two months, a series of escalations to the on-going trade spat between the United States and China had held the financial markets hostage, nearly forcing a change in U.S. monetary policy, while threatening to drive the global economy into recession.

After meeting for about 80 minutes, the two leaders emerged with the news that trade negotiations were back on. Furthermore, it looks like Trump offered a few concessions to get the deal-making process moving forward.

Chinese state-run press agency Xinhua described the meeting result as the presidents agreeing “to restart trade consultations between their countries on the basis of equality and mutual respect.”

Trump said afterwards that the meeting had gone as well as it could have, and that negotiations with China would continue. “We are right back on track,” the president said.

Impact on USD/JPY

I expect the initial reaction to the news to be bullish for the Dollar/Yen. I’m expecting firm U.S. Treasury yields which should drive up demand for the U.S. Dollar. Demand for risky assets should also be stronger.

Whether the rally in the USD/JPY and the other markets continues much beyond the potential initial spike to the upside in prices will be determined by how concerned investors are about the chances of an actual deal to end the trade dispute between the economic powerhouses. The stronger their convictions, the higher prices should rise.

There are no major reports from Japan this week, but investors will be locked in on Friday’s U.S. Non-Farm Payrolls report. A bullish report could encourage the Fed to hold rates steady at their meeting in late July and this could be bullish for the USD/JPY.

Watch the volume and volatility this week because Thursday, July 4 is a U.S. bank holiday. This could skew the price action especially if investors decide to take to the sidelines until Monday, July 8.

This article was originally posted on FX Empire