USD/JPY Fundamental Daily Forecast – Has a Dovish Powell Already Been Priced-in?

James Hyerczyk
Updated
A bearish jobs report combined with dovish comments from Powell could drive the USD/JPY sharply lower. However, there is still the possibility that soft comments from the Fed Chair have already been priced into the market.

Increased demand for risky assets as well as position-squaring ahead of today’s U.S. jobs report and speech by Fed Chair Jerome Powell are helping to underpin the Dollar/Yen early Friday. The range is tight and volatility is low, but that is to be expected considering the wild price swings on Thursday.

At 0922 GMT, the USD/JPY is trading 108.009, up 0.37 or +0.35%.

On Thursday, the USD/JPY spiked to its lowest level since early April before mounting a strong recovery. The rebound rally and today’s follow-through move suggests oversold conditions.

Helping to pressure the Dollar/Yen on Thursday was weaker-than-expected U.S. economic data and dovish remarks from a high-ranking U.S. Federal Reserve official. Falling U.S. Treasury yields also made the U.S. Dollar a less-desirable investment while increasing demand for the Japanese Yen.

U.S. Economic Data

In the U.S., the ISM Manufacturing PMI came in at 54.1, well below the 57.5 consensus and November’s 59.3, driven by the new orders subindex which slumped to 51.1 from 62.1.  The drop in the main index closely mirrors the sharp weakness recently seen in the equivalent China PMI import sub-index.

The soft ISM Manufacturing PMI report drove the U.S. 2 and 10-year bond yields lower by 10 and 8 basis points respectively, putting pressure on the U.S. Dollar while making the Japanese Yen a more desirable investment.

Fed Member Kaplan Dovish

Dovish remarks from Dallas Federal Reserve President Robert Kaplan also helped pressure the USD/JPY.

“There are three big issues that I see reflected in the markets that are consistent with what I’m seeing in the economy,” Kaplan said in an interview on Bloomberg TV.

“Global growth decelerating…, interest-sensitive industries are showing weakness… and financial conditions have tightened and credit spreads have widened.

“My own view is we shouldn’t take any further action on interest rates until these issues are resolved for better or for worse… so I would be an advocate of taking no action during the first couple of quarters of this year.”

Forecast

Later today at 1330 GMT, the U.S. will release its Non-Farm Payrolls report. The Non-Farm Employment Change is expected to show the economy added 179K jobs in December, up from 155K. The Unemployment Rate is expected to come in unchanged at 3.7%. Average Hourly Earnings are expected to have risen by 0.3%.

Traders may delay their reactions to the jobs data because at 1515 GMT, U.S. Federal Reserve Chairman Jerome Powell is scheduled to speak. Investors will be listening to hear if he softens his tone on interest rate hikes. Market participants are currently expressing fears that the Fed could bring on a recession with a policy misstep.

A bearish jobs report combined with dovish comments from Powell could drive the USD/JPY sharply lower. However, there is still the possibility that soft comments from the Fed Chair have already been priced into the market.

This article was originally posted on FX Empire

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