USD/JPY Fundamental Daily Forecast – Bulls Hoping for Hawkish Tone from Fed Speakers

The Dollar/Yen is trading higher on Tuesday after posting a dramatic technical closing price reversal top the previous session. Volatility could be highlighted for a second session as Japan remains on a bank holiday and thin trading conditions could lead to a second day of volatile price action. Helping to fuel some of today’s early strength, is a slight rise in U.S. Treasury yields.

At 10:21 GMT, the USD/JPY is trading 109.442, up 0.367 or +0.34%.

The U.S. Dollar is moving higher against the Japanese Yen early Tuesday as investors weigh whether a roaring U.S. economic recovery may force interest rates higher and are looking to upcoming economic data and policy speeches for clues.

Monday Recap

The USD/JPY reversed an earlier rally on Monday as Treasury yields dropped following softer-than-expected U.S. manufacturing data and reassurance from New York Fed President John Williams that the recovery so far is “not nearly enough” to prompt monetary policy tightening.

But the details in the Institute of Supply Management’s survey showed transport snarls and raw material shortages caused the dip in output, rather than any faltering demand and there are hints of division at the Fed over the best course of action.

U.S. manufacturing activity grew at a slower pace in April, constrained by shortages of supplies as surge in COVID-19 vaccines and massive fiscal stimulus unleashed stifled demand.

The ISM index of national manufacturing activity fell to a reading of 60.7 last month after rising to 64.7 in March, which was the highest level since December 1983. Economists polled by Reuters had predicted that the index would rise to 65 in April.

Daily Forecast

We’re looking for the volatility to continue partly due to the bank holiday in Japan, and Friday’s U.S. Non-Farm Payrolls report that is expected to show job creation continues to be strong.

If the jobs report comes in stronger than expected, then look for the market to start moving toward the idea that the Fed could move on policy sooner than projected in last week’s monetary policy statement.

The comments from several Fed speakers this week could also have an impact on the Dollar/Yen because of signs of division.

As mentioned earlier, New York Fed President John Williams that the recovery so far is “not nearly enough” to prompt monetary policy tightening.

But on Friday, Dallas Fed President caused a stir by calling for beginning the conversation about tapering. He is due to appear again at a Q&A session at 1700 GMT on Tuesday and a slew of Fed speakers are scheduled to talk in coming days.

“Non-voting hawks like Kapan and (Loretta) Mester could repeat Kaplan’s call for a conversation about tapering,” Westpac analysts said in a note.

“The Fed’s dovish influential core won’t have any of it, but expectations for solid U.S. data this week and likely more hawkish regional Fedspeak leave the dollar index positioned for more two-way price action.”

It may be too early for hawkish Fed speakers to fuel a rally, but not too soon to slow down the selling pressure.