USD/JPY Fundamental Daily Forecast – Being Pressured by Falling U.S., German Yields

The Dollar/Yen is trading lower on Wednesday. The price action continues to be controlled by the direction of global interest rates, particularly U.S. Treasury yields and German bund yields. Basically, concerns over global economic weakness has traders worried again and this is driving up demand for the safe-haven Japanese Yen.

At 08:22 GMT, the USD/JPY is trading 107.727, down 0.194 or -0.18%.

The week began with an upbeat tone with the Dollar/Yen gapping and rallying on Monday to a two week high on optimism over U.S.-China trade relations. The move was fueled by positive developments over the weekend at the G20 summit in Osaka, Japan. After a meeting, U.S. President Donald Trump and Chinese President Xi Jinping agreed to restart trade negotiations.

The rally started to fall apart late Monday after Trump said the trade deal had better favor the United States, but conditions really deteriorated on Tuesday after fears of an economic slowdown in Europe were exacerbated after the U.S. government threatened to impose tariffs on $4 billion of additional Euro Zone goods.

The 10-year Treasury yield fell back under 2% yesterday as concerns about global economic growth pushed investors into the safe-haven Yen. In Europe, the benchmark German bund fell to a new record low.

Conditions in the Europe are improving a little today after services PMI data in Spain, Italy, France, Germany and the Euro Zone came in better-than-expected. This helped give the Euro a boost, while Treasury yields moved off their lows.

Daily Forecast

The direction of the USD/JPY on Wednesday is likely to be determined by the ADP Non-Farm Manufacturing Change report at 12:15 GMT. Traders are looking for the report to show the private sector added 140,000 jobs in June. Better-than-expected data should give the U.S. Dollar a boost.

The second report, due out at 14:00 GMT, is ISM Non-Manufacturing PMI. It is expected to come in slightly lower at 56.1, down from 56.9. Once again, a stronger-than-expected number will be friendly for the U.S. Dollar.

Essentially, the price action is being manipulated by the interest rate differentials. Bad news about the US and European economies tend to tighten the spread between U.S. and Japanese rates. This tends to favor the Japanese Yen. Widening spreads tend to favor the U.S. Dollar.