USD/JPY – Yen Strengthens Following Stimulus Plan Report

The Japanese yen has posted strong gains in the Tuesday session, as USD/JPY is trading at 104.30. On the release front, Japanese SPPI, which measures corporate inflation, posted a weak gain of 0.2%, within expectations. In the US, we’ll get a look at consumer confidence and housing numbers. CB Consumer Confidence is expected to drop to 95.6 points, while New Home Sales is expected to improve to 560 thousand. On Wednesday, the US releases durable goods orders and the FOMC policy statement.

There was positive news out of the US, which posted two key events on Tuesday. CB Consumer Confidence dipped to 97.3 points in July, lower than the June reading of 98.0, but nonetheless another excellent release. New Home Sales followed suit, jumping to 592 thousand in June. This figure easily beat the forecast of 560 thousand. There was more good news from the manufacturing sector, as the Richmond Manufacturing Index surged, posting a reading of plus-10 points. This crushed the forecast of minus-4 points.

The yen continues show volatility, as the markets are expecting stimulus measures from the government and the Bank of Japan. The BoJ is under strong pressure to adopt further easing steps, but does it have any monetary ammunition left? Interest rates are already down to zero, and the economy continues to struggle with deflation. Other options available to the bank include expanding quantity or quality easing. Enter Prime Minister Shinzo Abe, who is expected to announce new fiscal measures in order to kick-start the languishing economy. On Tuesday, a Nikkei report stated that the government would unveil a direct fiscal stimulus of about JPY 6 trillion yen over the next few years. However, the markets are looking for a much higher stimulus program, perhaps as high as JPY 20 trillion. The USD/JPY jumped on the news, posting gains of 1 percent.

The Federal Reserve will join the Bank of Japan in the spotlight this week. The Fed meets for a policy meeting on July 27 but is unlikely to announce a rate hike at that time. However, with the US posting some solid numbers in the past few weeks, speculation has risen that the bank could raise rates before the end of the year. Another rate hike will be data-dependent, so if key indicators beat expectations, the likelihood of a rate hike will continue to increase. Still, there are some key factors which mitigate against a hike in the next few months. First, inflation remains stuck at low levels, well short of the Fed’s target of around 2 percent. Fed policymakers will be hesitant to raise rates if inflation is not projected to point upwards. Second, most of the recent data is from June, and does not fully take into account the Brexit vote on June 23. Fed members have expressed concern about the economic fallout from Brexit, and will want to review releases coming out in August and September in order to gauge the effects of Brexit.

USD/JPY Fundamentals

Monday (July 25)

• 19:50 Japanese SPPI. Estimate 0.1%. Actual 0.2%

Tuesday (July 26)

• 9:00 US S&P/CS Composite-20 HPI. Estimate 5.6%
• 9:45 US Flash Services PMI. Estimate 51.2
• 10:00 US CB Consumer Confidence. Estimate 95.6
• 10:00 US New Home Sales. Estimate 560K
• 10:00 US Richmond Manufacturing Index. Estimate -4

Upcoming Key Events

Wednesday (July 27)

• 8:30 US Core Durable Goods Orders. Estimate 0.3%
• 14:00 US FOMC Statement
• 14:00 US Federal Funds Rate. Estimate <0.50%

*Key events are in bold

*All release times are EDT

USD/JPY for Tuesday, July 26, 2016

USD/JPY July 26 at 7:30 EDT

Open: 105.59 High: 105.64  Low: 103.99 Close: 104.33

USD/JPY Technical

• USD/JPY posted sharp losses in the Asian session, breaking through two support levels. The pair is flat in European trade
• There is resistance at 104.99
• 103.73 is providing support
• Current range: 103.73 to 104.99

Further levels in both directions:

• Below: 103.73, 102.36 and 101.20
•  Above: 104.99, 105.87, 106.81 and 107.65

OANDA’s Open Positions Ratio

The USD/JPY ratio has posted slight gains towards long positions. Currently, long positions have a majority (58%), indicative of trader bias towards USD/JPY reversing directions and moving towards higher ground.

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.