USD/JPY Forecast: Lower as Treasury Yields Decline on Recession Concerns

Highlights

• Treasury yield drop weakens USD/JPY
• Poor US data signals possible recession
• Inflation poses challenge for Fed, BOJ

Overview

The Dollar/Yen is edging lower on Friday as traders react to an overnight drop in Treasury yields. The follow-through move from the previous session is tightening the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-desirable asset.

At 05:00 GMT, the USD/JPY is trading at 133.877, down 0.349 or -0.26%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.31, up $0.22 or +0.32%.

US Economic Data Raises Concerns Over Greenback’s Rally as Fed Weighs Rate Hike Decision

Earlier in the week, the greenback had been supported against the yen, hitting a one-month high on Wednesday. This was due to rising expectations that the US Federal Reserve would raise interest rates by 25 basis points in May, which would make the dollar more attractive to investors. The CME FedWatch tool, which tracks market expectations of Fed rate hikes, showed that the probability of a rate hike in May had increased from 67% to 84.5% over the course of the week.

However, the greenback’s gains were capped by poor economic data released on Thursday, which raised concerns about a possible recession in the US. The number of Americans filing new claims for unemployment benefits increased moderately last week, indicating that the labor market may be slowing down. In addition, a report from the Philadelphia Fed showed that its measure of factory activity in the mid-Atlantic region had plunged to its lowest level in nearly three years in April.

Despite concerns about a possible recession, inflation remains high, which has led some analysts to predict that the Fed will still raise interest rates at least one more time. However, this poses a challenge for the Fed as raising interest rates could further slow down economic growth, potentially exacerbating a recession.

Japan’s Inflation Concerns Weigh on USD/JPY as BOJ Policy Meeting Approaches

Concerns over rising inflation weighed on the USD/JPY as Japan’s economy showed signs of broadening price pressures. On Friday, data revealed that the core consumer price index in Japan had risen 3.1% in March from the previous year, while an index excluding fuel costs had risen at the fastest annual pace in four decades. The Bank of Japan (BOJ) is under pressure to shift away from its ultra-loose monetary policy stance as consumer inflation in Japan has held steady above its target.

Friday’s data kept market expectations alive that the BOJ could phase out its massive stimulus program later this year. All eyes are now on next week’s BOJ policy meeting. It will be the first to be chaired by new central bank Governor Kazuo Ueda. Ueda may not change policy at his first meeting. However, there have been hints about a policy review, indicating that the BOJ may move in the next few months.

For a look at all of today’s economic events, check out our economic calendar.