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USD/JPY Weekly Analysis – May 8, 2017

USD/JPY Weekly Analysis – May 8, 2017

Increased demand for higher risk assets and expectations of higher U.S. interest rates drove the Dollar/Yen to a six-week high last week.

The USD/JPY finished the week at 112.667, up 1.178 or +1.06%.

Demand for higher yielding assets rose last week as investors increased bets that French centrist Emmanuel Macron would soundly defeat far-right candidate Marine Le Pen in this Sunday’s French presidential election.

The news about the French election drove European stock indexes sharply higher. They are now outperforming the major U.S. indexes by 4 percent. U.S. stocks were also supported by robust earnings reports from several major companies. The increased demand for stocks drove the lower-yielding Japanese Yen down.

The U.S. Federal Reserve helped drive Treasury yields higher, making the U.S. Dollar a more attractive investment. On May 3, the Fed kept interest rates unchanged as widely expected, however, while its monetary policy statement acknowledged weakness in the first quarter, it also left the door open for a June rate hike.

Support for the Fed’s rate hike decision was further generated by Friday’s better-than-expected U.S. Non-Farm Payrolls report.

According to the government, 211,000 jobs were added in April, more than the 194,000 forecast by economists. The unemployment rate fell to 4.4 percent, a 10-year low, and Average Hourly Earnings rose 0.3%.

Forecast

Futures markets are pricing in a 93 percent chance the Federal Reserve will raise its key interest rate in June. This should be high enough to maintain support for the USD/JPY. However, the Forex pair may still be vulnerable to a correction in the U.S. equity markets and the reemergence of tensions over North Korea.

Since the Fed doesn’t meet until June 13 and 14, traders have time to move the market in either direction. Therefore, don’t be surprised if we see periodic weakness in the USD/JPY even though the main trend is up on the short-term charts.

The USD/JPY may have run into resistance last week at 112.682. We’ll know if 111.812 fails as support. If it does then look for prices to possibly retreat to 110.584 to 110.003 over the near-term. A move of this size, however, will likely be fueled by an unexpected external event.

In the U.S., the highlights of the week will be consumer inflation and retail sales. There are no major reports out of Japan this week, but at the end of the week and next week-end, investors will begin to shift their focus on the G7 meetings.