USD/JPY Fundamental Daily Forecast – Better-than-Expected US Economic Data Underpins Dollar/Yen

The Dollar/Yen closed slightly lower on Friday in a volatile session with traders essentially mirroring the price action in U.S. Treasury yields. Nonetheless, sellers remained in control with the Forex pair trading lower for a 17^th session while testing its lowest level since March 4.

The price action continues to reflect the notion that despite expectations of higher inflation, traders believe that the Fed will be able to control it while maintaining current policy. Furthermore, investors are also buying into the Fed’s idea that any gain in inflation is likely to be “transitory”.

On Friday, the USD/JPY settled at 107.877, down 0.096 or -0.09%.

Also influencing the choppy price action on Friday was investor assessment of President Joe Biden’s capital gains tax proposal, better-than-expected U.S. economic data and next week’s Fed Reserve announcements.

Treasury Yields Little Changed as Investors Focus on Biden’s Tax Proposal

U.S. Treasury yields were little changed on Friday, with investor focus on President Joe Biden’s capital gains tax proposal. The tight move in yields and the USD/JPY on Friday follow reports that Biden will seek to raise taxes on millionaire investors to fund education and other spending priorities.

Biden will seek an increase in the tax on capital gains to 39.6% from 20% for those Americans earning more than $1 million, according to multiple outlets, including Bloomberg News and The New York Times.

The impact of Biden’s proposal wasn’t as dramatic as previously thought especially after Thursday’s meltdown in the U.S. stock market after the story broke. After assessing the potential impact of the expected proposal, analysts found many reasons why such a policy alone would be unlikely.

Some traders were expecting the USD/JPY to rally because of safe-haven buying, however, U.S. stocks rebounded, dampening the need for investor protection.

Solid US Economic Data May Have Provided Support

The recovery in the USD/JPY after an early set back on Friday may have been fueled by stronger-than-expected U.S. economic data.

Markit’s preliminary manufacturing purchasing manager’s index for April came in at 60.6, slightly ahead of estimates from economists surveyed by Dow Jones. The composite came in at 62.2. The readings for manufacturing, services and the composite index were all at a record high for Markit’s flash series.

New home sales jumped in March after February’s cold weather across the country, with more than a million houses sold, the Census Bureau said Friday.

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