USD/JPY Fundamental Weekly Forecast – Risk Sentiment Driving the Price Action

The Dollar/Yen closed lower last week as a sell-off in U.S. equity markets sent investors looking for protection into the safe-haven Japanese Yen. The catalyst behind the move was uncertainty over U.S. stimulus.

For the week, the benchmark S&P 500 Index shed 0.96%. The blue chip Dow Jones Industrial Average lost 0.57% and the tech-weighted NASDAQ Composite lost 0.69%. The declines for the S&P and NASDAQ marked their biggest weekly declines since the end of October.

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In response to the drop in demand for risky assets, the USD/JPY settled at 104.049, down 0.141 or -0.14%.

US Coronavirus-Aid Impasse Weighs on Demand for Risk

Helping to drive down demand for equities and consequently the Dollar/Yen was an impasse in the U.S. Congress over a new COVID-19 Relief package.

The U.S. Senate, facing a midnight deadline on Friday, unanimously approved a one-week extension of federal funding to avoid a government shutdown and to provide more time for separate negotiations on COVID-19 relief and an overarching spending bill.

Lawmakers have wrangled for months over a fresh fiscal stimulus package to support an economy battered by coronavirus lockdowns. New York Governor Andrew Cuomo on Friday suspended indoor dining in New York City, effective Monday.

[fx-article-ad]Japan Economic News: Surprise Jump in Final GDP, Core Machinery Orders

Japans economy grew an annualized 22.9% in July-September, better than the initial estimate of a 21.4% expansion, revised data from the Cabinet Office showed on Tuesday, as it rebounded from a COVID-induced recession.

The revised figure for gross domestic product (GDP) compared with economists median forecast for 21.5% growth in a Reuters poll.

Japan‘s Core machinery orders rebounded sharply in October from the previous month’s drop, the government said on Wednesday, a welcome development for an economy emerging from a deep coronavirus slump.

The jump in core orders suggests a modest revival in corporate spending, seen by policymakers as necessary to accelerate the recovery in the worlds third-largest economy.

Core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, soared 17.1% in October, recouping the previous months 4.4% drop.

The increase, the largest month-on-month rise since comparable data became available in 2005, was much better than a 2.8% expansion forecast by economists in a Reuters poll.

Weekly Forecast

We believe that the start of vaccinations in the United States will take a backseat to concerns over a COVID-19 relief package. Nonetheless, USD/JPY traders will take their cues from risk sentiment.

A rise in risk sentiment will likely boost the Dollar/Yen, while a drop in demand for risky assets will likely send investors into the Japanese Yen for safety.

The U.S. Federal Reserve meets on December 15-16. Policymakers are going to spend a lot of time discussing the downside risks to the economy. The Fed essentially has four key questions to deal with.

• With risks mounting, how will officials adjust their asset purchase plans？

• How will the Fed respond to rising downside risks？

• How will the Summary of Economic Projections look with potential positive signs of a vaccine？

• How will markets react when special Fed lending programs officially shut down？

In other news, the Bank of Japan is widely expected to leave interest rates and policy unchanged.

For a look at all of todays economic events, check out our economic calendar.