USD/JPY Fundamental Daily Forecast – Lower as Treasury Yields Dip Ahead of PPI Report

The Dollar/Yen is edging lower on Friday as concerns over an economic slowdown in the United States increased. Although the subdued price action is suggesting a generally nervous tone ahead of the U.S. Federal Reserve’s monetary policy statement, interest rate decision and economic projections on Dec. 14.

At 09:00 GMT, the USD/JPY is trading 136.186, down 0.495 or -0.36%. On Thursday, the Invesco CurrencyShares Japanese yen Trust EFT (FXY) settled at $68.26, down $0.15 or -0.22%.

Ahead of the start of the Fed’s two-day meeting next Tuesday, money markets are pricing in a 93% chance the Fed will raise rates by 50 basis points, with rates now seen peaking at just below 5% in May.

Dollar/Yen Plunging Since Hitting Multi-Month Top on Oct. 21

The combination of an aggressive intervention by the Bank of Japan and expectations that the Fed will scale back on the pace of its interest rate hikes and that rates may not rise as high as previously feared, has knocked the Dollar/Yen more than 12% off its two-decade peak hit in late October.

Yields on U.S. Treasuries have also slumped, with the two-year yield, which typically reflects interest rate expectations, last at 4.3035%, away from its 15-year high of nearly 4.9% hit last month.

Meanwhile, a closely watched part of the U.S. Treasury yield curve, measuring the gap between yields on two- and 10-year Treasury notes was inverted at -83.7 bps. An inversion of this yield curve is typically a precursor to recession.

Japan’s Q4 Tankan Factor Mood Set to Weaken on Inflation, Global Slowdown

Japanese manufacturers’ sentiment likely weakened in the last quarter of 2022 on sustained cost pressures and a bleaker global economic outlook, a Reuters poll of analysts showed on Friday.

Shrinking business confidence bodes ill for the world’s third-largest economy, as firms brace for labor talks in early 2023. Wage hikes are seen as essential to revive the economy’s feeble growth.

The Bank of Japan’s (BOJ) closely-watched “tankan” corporate survey is likely to show the headline index for big manufacturers’ mood down for a fourth consecutive quarter to 6 in December from 8 in September, according to 17 economists surveyed by Reuters.

Short-Term Outlook

The USD/JPY is falling in response to a dip in U.S. Treasury yields on Friday as investors awaited the release of November’s producer price index (PPI), which will provide fresh insights into whether inflation is easing.

On Friday, the fresh PPI data, which reflects wholesale inflation, will show whether the rate hikes implemented so far this year have been effective in pushing back against rising prices. The data could also provide hints about future rate policy to investors.

The PPI and Core PPI are expected to have risen by 0.2% in November. A cooler-than-expected ready could drive the USD/JPY sharply lower on Friday.

Preliminary Michigan consumer sentiment figures for December are another key data point investors will be watching closely along with the UoM Inflation Expectations.