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USD/JPY Fundamental Weekly Forecast – Boosted by Rising U.S. Yields, Aggressive BOJ Bond Buying

The Dollar/Yen consolidated most of last week before spiking to the upside on Friday. Earlier in the week, the Forex pair was supported by rising U.S. Treasury yields, but gains were capped by flight-to-safety buying fueled by a sell-off in the stock market and concerns over North Korea. ‘

The USD/JPY settled the week at 113.897, up 1.537 or +1.37%.

U.S. Treasury yields were supported early in the week by follow-through buying related to hawkish comments from several central bank officials the previous week.

The USD/JPY sold off briefly at mid-week after the release of less-hawkish-than-expected minutes from the Federal Reserve’s June monetary policy meeting.

The minutes showed several Fed officials voiced concern over the effect that their recent measures were having on financial markets. They felt the Fed’s most recent interest rate hike posed increasing risks to financial stability and the economy.

The minutes also revealed a determination to continue raising rates even with muted inflation levels, which they considered to be temporary and likely to rise over the long run to a targeted level of 2 percent.

The Fed also outlined its plan to reduce its $4.5 trillion balance sheet of bond holdings. A plan it expects to pull-off with “limited” disruption to financial markets. However, the central bank did not reveal when it would begin trimming its balance sheet.

Helping to boost the USD/JPY at the end of the week was the Bank of Japan’s decision to step up plans for its bond-buying. This aggressive action was intended to stop the rise in Japanese bond yields. The BOJ has set a target of keeping the 10-year JGB yield at zero. Buying bonds through its quantitative easing program enforces this policy.

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Weekly USDJPY

Forecast

This week, the focus will be on U.S. economic data and the testimony of Fed Chair Janet Yellen.

Fed Chair Janet Yellen is scheduled to testify before Congress on July 12 and 13. Her topic will be U.S. Federal Reserve Monetary Policy.

The U.S. will also report on Producer Inflation, but more importantly Consumer Inflation and Retail Sales. The CPI is expected to come in at 0.2%, up slightly from 0.1% and retail sales are expected to come in at 0.2%, much better than the previous -0.3%.

Yellen is expected to talk about the Fed’s semi-annual monetary policy report that reiterated the central bank’s desire to raise interest rates at least one more time later this year, despite muted inflation figures.

The upside momentum in the USD/JPY is expected to continue as long as Yellen and the economic data continues to boost U.S. Treasury yields. Further support will come if the BOJ continues to buy its long-term debt.

Gains could be limited, or the USD/JPY could move lower if there is a large enough sell-off in the U.S. equity markets to send investors into the safety of the Japanese Yen.

This article was originally posted on FX Empire

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