USD/JPY Fundamental Weekly Forecast – Treasury Yields Will Control the Direction of the Dollar/Yen

The Dollar/Yen had a volatile week, first spiking to the upside to its highest level since December 20 then to the downside before finishing lower for the week. The price action was primarily fueled by a decline in U.S. Treasury yields. Traders seemed to pay little attention to the increased demand for risky assets which drove the S&P 500 and Nasdaq Composite indexes to record high closes.

Last week, the USD/JPY settled at 111.575, down 0.361 or -0.32%.

Bank of Japan

Last week, the Bank of Japan left its ultra-loose monetary policy unchanged after its two-day policy meeting, but added a new time frame, saying the “extremely low” rates would be maintained “at least through around spring 2020”.

Policymakers cited global economic uncertainties and the risks of a scheduled hike in consumption tax later this year from eight percent to 10 percent.

Economic growth would also come in at 0.8 percent this fiscal year, climbing to 0.9 percent the year after. It forecast GDP at 1.2 percent in the fiscal year ending in 2022.

The BOJ also predicted the economy will fail to reach its 2% inflation target even by 2022. It forecast inflation of 1.6 percent in the fiscal year ending March 2022. It also revised down its inflation forecast for the year to March 2021 to 1.3 percent from 1.4 percent.

U.S. Treasury Yields Fall

U.S. government debt yields followed European rates lower on Wednesday after new data suggested a gloomier outlook amid German business leaders. Bond yields around the world dipped after the Ifo Institute reported that confidence in German c-suites unexpectedly fell in April. The Munich-based researcher’s business climate indicator fell for a seventh month in the last eight and contradicted upbeat forecasts with a 99.2 print. April’s print was the indicator’s lowest reading since 2016.

Yields continued to tumble on Friday even though the U.S. government said economic activity rose more than expected during the first few months of 2019. The Bureau of Economic Analysis said Friday that first-quarter GDP expanded by 3.2%, the best start to a year since 2015 and well ahead of economist expectations for 2.5% growth.

Weekly Forecast

This week’s price action is likely to be driven once again by the direction of U.S. Treasury yields and there are a lot of events that could move yields and consequently the Dollar/Yen.

Volatility this week could be fueled by the U.S. Federal Reserve’s interest rate and monetary policy decisions on Wednesday. Traders are looking for the Federal Open Market Committee to continue holding borrowing costs steady for the third time this year. Over the past few weeks, policymakers in their speeches have all basically said that interest rates were currently in the right place.

Traders should also look for the possibility of downgraded views of inflation from the Fed. Additionally, some are expecting the Fed to more clearly define their patient stance.

Traders will also get the opportunity to react to U.S. Consumer Confidence, ISM Manufacturing PMI and the U.S. Non-Farm Payrolls report.

Essentially, higher yields and increased demand for risk will be bullish for the USD/JPY, and lower yields will be bearish for the Forex pair.

Traders will also react to events in Europe if they continue to drive yields lower.