USD/JPY Fundamental Daily Forecast – Powell’s Testimony Likely to Impact Dollar/Yen

A sharp rise in U.S. equity markets helped drive the Dollar/Yen higher because of the carry trade on Monday. Investors borrowed money in Japan, sold the Yen and bought the dollar as investors bet Fed Chair Jerome Powell would deliver a somewhat dovish testimony before Congress.

The USD/JPY settled at 106.943, up 0.096 or +0.09%.

The U.S. Dollar posted a tight, but lower range against a basket of currencies on Monday, suggesting investor indecision and impending volatility. The dollar has been building a support base for a few weeks, bolstered by the prospect of further interest rate hikes by the Federal Reserve.

Concerns about rising inflation after a prolonged period of stagnant price gains have raised the possibility that the Fed could tighten more than expected this year and the next. This news has underpinned the Forex pair since February 16.

The major U.S. equity indexes posted sharply higher gains on Monday amid a stabilization in U.S. Treasury yields, which drove up demand for higher risk assets.

U.S. Treasury yields retreated on Monday after reaching four-year highs a little under 3 percent last week. The 10-year yield neared its lowest level since February 14, when the 10-year yielded as low as 2.808 percent.

In other news, according to the U.S. Commerce Department, sales of previously owned homes dropped for a second consecutive month in January amid near-record low inventory. It also added to soft January retail and industrial production data in suggesting economic growth slowed at the start of the year.

The Commerce Department said new home sales dropped 7.8 percent to a seasonally adjusted annual rate of 593,000 units last month, the lowest level since August 2017. Economists polled by Reuters had forecast new home sales, which account for nearly 10 percent of the housing market, rising to a pace of 645,000 units last month.

Forecast

The USD/JPY is trading nearly flat early Tuesday, giving back gains achieved in Asian and European markets as traders tweaked positions ahead of Jerome Powell’s first public appearance as Federal Reserve Chairman.  Powell’s testimony could determine whether the greenback’s recovery from a three-year low can be sustained.

Newly appointed Fed Chair Jerome Powell will testify on the central bank’s semi-annual report on monetary policy and the economy on Tuesday, before the U.S. House of Representatives’ Financial Services Committee. Powell’s first congressional testimony comes at a time when investors are concerned over the pace of U.S. monetary tightening after years of stimulus.

Powell is expected to sound optimistic about the economy, but is likely to ask investors to be patient in assessing whether inflation will head higher this year.

A hawkish testimony is likely to be supportive for the U.S. Dollar which could drive USD/JPY higher. The rally could be limited by weakness in U.S. equity markets, however. A dovish testimony could weaken the U.S. Dollar and make it a less-attractive investment.

Traders will also get the opportunity to react to a number of U.S. reports which could have an impact on the dollar and consequently the Aussie and Kiwi.

At 1330 GMT, the U.S. will release its latest data on Core Durable Goods Orders. It is expected to come in at 0.4%, below the previous 0.7%. Durable Goods Orders are expected to come in at -2.4, well-below the 2.8% previously reported.

The U.S. Goods Trade Balance is expected to come in unchanged at -72.3 Billion. Preliminary Wholesale Inventories are expected to rise 0.3%.

The HPI is forecast at 0.4% and the S&P/CS Composite-20 HPI is expected to come in up 6.3%, down slightly from the previous 6.4%.

Conference Board Consumer Confidence is expected to come in at 126.2, slightly above the previously reported 125.4. The Richmond Manufacturing Index is estimated at 15.

In other news, the Bank of Japan Core CPI rose 0.8%, higher than the forecast and previous read.