USD/JPY – Yen Rally Continues on Trump Setback

USD/JPY has resumed its rally in the Tuesday session. In the North American session, the pair is trading at 111.70, down 0.80% on the day. On the release front, there are no Japanese events on the schedule. In the US, there are three minor indicators. On Wednesday, the focus will be on construction numbers, with the release of Building Permits and Housing Starts. The Bank of Japan will release a monetary policy statement.

All eyes will be on the BoJ on Wednesday, as policymakers meet for a policy meeting. Unlike other central banks, such as the ECB and the Federal Reserve, there are no expectations of a tightening of monetary policy in the near future. However, investors will be looking for any tweaks to current monetary policy, which could trigger some movement from the yen. Inflation continues to hover below 1.0%, well below the BoJ’s target of 2%. Most analysts expect the bank to push back the timeline for the 2% target, which is currently “around fiscal 2018”, but do not anticipate the bank lowering the target. The BoJ has consistently said that it will not reduce its radical stimulus program until inflation levels move higher. Given current economic conditions, this is unlikely before 2018 at the earliest.

President Trump can’t seem to catch a break. There was more bad news this week, as his health care bill, which replaces much of Obamacare, has stalled in the Senate, after two Republicans announced they would not support the bill. The Republican leadership has admitted defeat, saying it will not attempt to advance the health care proposal before Congress takes a recess in August. This decision is a major setback for President Trump, who had made a new health care act a key part of his agenda. Despite Republican control of both houses of Congress and the White House, no major legislation has been passed since Trump took over as president 6 months ago. With this latest defeat, there is growing skepticism as to whether Trump will be able to convince Congress to pass other key parts of his agenda – tax reform and fiscal spending.

Inflation levels in the US have been stubbornly low, despite a generally strong economy and a tight labor market. Still, the Federal Reserve remains convinced that it’s only a matter of time before inflation levels move higher. This stance was reiterated by Fed Chair Janet Yellen last week, as she testified before congressional and senate committees. With the labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn’t translated into higher inflation. In her testimony, Yellen admitted that the Fed was at a loss to explain the lack of inflation, but insisted that it was “premature to conclude that the underlying inflation trend is falling well short of 2 percent”, and that with a strong labor market “the conditions are in place for inflation to move up”. Is Yellen’s argument just wishful thinking? The markets aren’t buying in, with a rate hike considered extremely unlikely in September. As for a December increase, the odds are currently at just 47%, according to the CME Group. Consumer spending and inflation numbers were soft in June, and the disappointing numbers will do little to improve market skepticism about one last rate hike this year.

USD/JPY Fundamentals

Tuesday (July 18)

• 8:30 US Import Prices. Estimate -0.2%. Actual -0.2%
• 10:00 US NAHB Housing Market Index. Estimate 67. Actual 64
• 16:00 US TIC Long-Term Purchases. Estimate 20.3B

Wednesday (July 19)

• 8:30 US Building Permits. Estimate 1.20M
• 8:30 US Housing Starts. Estimate 1.16M
• Tentative – BoJ Monetary Policy Statement

*All release times are GMT

*Key events are in bold

USD/JPY for Tuesday, July 18, 2017

USD/JPY July 18 at 10:40 EDT

Open: 112.62 High: 112.70 Low: 111.77 Close: 111.74

USD/JPY Technical

USD/JPY posted losses in the Asian session. The pair showed limited movement in the European session and has resumed moving downward in North American trade

• 110.94 is providing support
• 112.57 is the next resistance line

Current range: 110.94 to 112.57

Further levels in both directions:

• Below: 110.94, 110.10 and 108.63
•  Above: 112.57, 113.55, 114.37 and 115.51

OANDA’s Open Positions Ratios

USD/JPY ratio is almost unchanged in the Tuesday session. Currently, short positions have a slight majority (53%). This is indicative of trader bias towards USD/JPY continuing its downward movement.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.