Fundamental Forecast for the Japanese Yen:Â Neutral
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Headlines coming out of the G20 meeting may yield a limited reaction in USD/JPY as the group of global finance ministers strive to avert a currency war, and risk trends may continue to influence the dollar-yen exchange rate over the remainder of the month as both the Federal Reserve and Bank of Japan (BoJ) largely endorse a wait-and-see approach for monetary policy.
The broader outlook for the U.S. dollar remains constructive as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2017, and Chair Janet Yellen and Co. may continue to prepare U.S. households and business for higher borrowing-costs especially as the U.S. economy approaches full-employment. As a result, the recent pickup in the U.S. Consumer Price Index (CPI) may encourage the central bank to lift the benchmark interest rate sooner rather than later, but the remarks from the Humphrey-Hawkins testimony suggests Chair Yellen is in no rush to implement another rate-hike as the central bank head argues ‘inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.’
With that said, the 2017 FOMC voting members (Minneapolis Fed President Neel Kashkari, Philadelphia Fed President Patrick Harker and Fed Governor Jerome Powell) schedule to speak in the week ahead may strike a similar tone to Chair Yellen, and the fresh rhetoric may do little to alter the interest rate outlook as Fed Fund Futures continue to highlight limited expectations for a March rate-hike, with market participants still pricing a greater than 60% probability for a move in June. The FOMC Minutes may share a similar and fail to prop up the greenback as officials expect ‘the evolution of the economy to warrant further gradual increases in the federal funds rate,’ and more of the same rhetoric may produce range-bound conditions in the exchange rate, with the pair with the pair at risk of giving back the advance from earlier this month as risk appetite abates.
