USD/JPY Fundamental Daily Forecast – Traders Eyeing U.S. Housing Numbers for Further Confirmation of Weakening Economy

Safe-haven buying, lower Treasury yields and an easing of demand for higher-yielding assets continue to weigh on the Dollar/Yen early Tuesday. The Forex is pair has produced a lower-low for six consecutive sessions, changing the main trend to down on the daily chart in the process. The sell-off likely reflects a growing shift in sentiment towards overheating inflation and the pace of future U.S. Federal Reserve rate hikes.

At 0727 GMT, the USD/JPY is trading 112.478, down 0.075 or -0.07%.

Early Tuesday, the USD/JPY is hovering near its lowest level since October 30 as cautious comments by several Federal Reserve officials recently over the global economy and weak domestic data raised questions over whether the U.S. central bank will slow down the pace of its rate increases.

Late Monday, New York Fed President John Williams told a Q&A event that “We will be likely raising interest rates somewhat, but it is really in the context of a very strong economy.”

Williams also said the Fed is not on a pre-set course and will adjust monetary policy to keep the economy strong with low inflation.

Williams’ comments come on the heels of last week’s remarks from Fed Vice Chair Richard Clarida and Dallas Fed President Robert Kaplan, who raised concerns over a potential global slowdown.

In other news, the Dollar/Yen was also pressured by surprisingly weak housing data, which pushed down U.S. 10-year bond yields. U.S. homebuilders’ sentiment recorded its steepest one-month drop in over 4-1/2 years, suggesting that rising borrowing costs are squeezing the real estate sector.

Forecast

A potential shift in the interest-rate cycle has some traders betting heavily that the Fed will begin to slow the pace of its rate hikes. This is helping to weigh on the USD/JPY. Look for further downside pressure if this tone continues.

There was no fresh data from Japan on Tuesday. On Wednesday, investors will get the opportunity to react to U.S. data on Building Permits and Housing Starts at 1330 GMT.

Building Permits are forecast to have risen 1.26 million units. Housing Permits are estimated to have risen 1.23 million units.

The housing numbers will be watched closely by traders because of their impact on the economy and future Fed policy. Weak data will likely drive the USD/JPY lower because it may reduce the chances of at least three Fed rate hikes next year.

Further selling pressure on U.S. stock indexes will be supportive for the Japanese Yen because of flight to safety buying especially if the volatility index rises sharply.