USD/JPY Fundamental Weekly Forecast — Downside Pressure Likely as Early Rate Hike Expectations Fade

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The Dollar/Yen settled higher last week, but most of those gains were fueled early in the week when investors were betting that runaway inflation would lead to an earlier than expected rate hike by the Federal Reserve.

Conflicting comments from Fed officials and a PCE index inflation report that met expectations, however, seemed to change investor sentiment, leading to lower closes on Thursday and Friday. The late selling pressure could spill over into this week with investors likely to seek some protection ahead of this Friday’s U.S. Non-Farm Payrolls report and long U.S. holiday weekend.

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Last week, the USD/JPY settled at 110.782, up 0.567 or +0.51%.

US News that Moved the Dollar/Yen

Early last week, Federal Reserve Chair Jerome Powell said in prepared testimony for a congressional hearing that the U.S. economy continues to show “sustained improvement” from the impact of the coronavirus pandemic and ongoing job market gains, but inflation has “increased notably in recent months.”

Powell did not go into detail in his prepared remarks on current monetary policy, or the possibility the U.S. central bank may have to speed up it plans to pull back on some support for the economy because of the faster rise in prices.

In his remarks, Powell said he regards the current jump in inflation, in fact, as likely to fade.

“We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances,” Powell said in a hearing before a House of Representatives panel.

Not all Fed members were on the same side as Fed Chair Powell, however.

St. Louis Fed President James Bullard said the Federal Reserve should be prepared for inflation to surprise on the high end through next year.

Atlanta Fed President Raphael Bostic said with growth surging to an estimated 7% this year and inflation well above the Fed’s 2% target, he now expects interest rates will need to rise in late 2022. Both Bostic and Fed Governor Michelle Bowman said that while they largely agree recent prices increases will prove temporary, they also fell it may take longer than anticipated for them to fade.