USD/JPY Fundamental Weekly Forecast – Get Ready for Volatile Reaction to Powell Testimony

The Dollar/Yen was mostly rangebound last week, but still managed to close higher on the back of rising U.S. Treasury yields and increased demand for risky assets. The catalyst behind the moves were the U.S. Federal Reserve’s Monetary Policy Meeting Minutes, which showed a less-dovish central bank. Treasury traders thought the minutes indicated the Fed could raise rates at least once in 2019. Mixed U.S. economic data also pressured the Dollar/Yen at times.

Bank of Japan Governor Haruhiko Kuroda said early last week the central bank was ready to ramp up stimulus if sharp Yen rises hurt the economy and derail the path toward achieving its 2 percent inflation target.

Later in the week, Kuroda said the central bank would “of course” consider easing monetary policy further if the economy lost momentum toward achieving its 2 percent inflation target. It has various ways it could do this including cutting interest rates and accelerating government bond purchases, and it could combine such steps of needed.

“The BOJ will adopt policy that is most appropriate in light of economic and financial developments, and has the least side effects,” Kuroda said.

The USD/JPY settled at 110.669, up 0.203 or +0.18%.

Weekly Forecast

Last week’s mostly sideways trade in the USD/JPY sent a message to me that investors weren’t worried about risk or the direction of interest rates. The muted reaction to the mixed-to-potentially bearish U.S. economic data further confirmed my assessment. However, the skeptic in me says those are the exact things we should be worried about this week.

Stocks have been steadily climbing for nine weeks. Furthermore, downside risks have been dampened. According to FactSet, the S&P 500 Index hasn’t experienced a decline of 1% or more for the last 20 trading days. Additionally, the headlines about a U.S.-China trade deal may have convinced investors that they have no worries.

Given last week’s tight trading range in the USD/JPY, I think investors should approach this week with an air of caution because I don’t think this pattern will continue. A second week of extreme tightness would support my argument even more that the Dollar/Yen is setting up for the return of heightened volatility.

The early focus this week for Dollar/Yen traders should be on U.S. Treasury yields. The chart pattern in the March 10-year U.S. Treasury note futures contract suggests investors need to prepare for a major move in Treasury yields. The catalyst behind this move could be the three days of testimony by U.S. Federal Reserve Chairman Jerome Powell on Tuesday, Wednesday and Thursday.

If Powell is dovish in his remarks then then Treasury yields could plunge and this would be bearish for the USD/JPY. A steep drop in U.S. Treasury yields this week will tighten the interest rate differential, making the U.S. Dollar a less-desirable assets.

If Powell is hawkish then Treasury yields could soar, triggering a spike to the upside in the USD/JPY.

The direction of the USD/JPY is uncertain because it depends on Powell. However, I am confident that we will see better-than-average volatility this week.