USD/JPY Fundamental Daily Forecast – Dovish Fed Speakers Weigh on Dollar/Yen Ahead of Thurs/Fri Key Reports

The Dollar/Yen is trading flat early Wednesday after closing nearly unchanged the previous session. Despite the lack of progress on the day, the Forex pair did whip-saw throughout the session while posting an outside move. The price action was driven by U.S. economic data, comments from Federal Reserve officials and Treasury yields.

Investors are also starting to position themselves ahead of Thursday’s U.S. Preliminary GDP, weekly unemployment claims and durable goods reports, and Friday’s reports on Core PCE, Trade Balance, Personal Income, Personal Spending and Consumer Sentiment.

At 01:27 GMT, the USD/JPY is trading 108.759, down 0.012 or -0.01%.

Dollar/Yen Continues Downside Bias

The Dollar continued its slide against the Japanese Yen on Tuesday as U.S. interest rates fell on U.S. Federal Reserve arguments for easy monetary policy despite current inflationary forces.

The dollar weakness came as U.S. Treasury yields fell to fresh multi-week lows and the yield curve flattened after an auction of two-year notes attracted solid demand. Benchmark 10-year Treasuries fell as low as 1.56% on Tuesday afternoon.

The drop in U.S. Government bond yields tightened the spread with Japanese Government bond yields, making the Japanese Yen a more attractive asset.

Soft US Economic Data

In economic news, the Conference Board’s Consumer Confidence Index fell slightly in May to 117.20. Traders were looking for a reading of 119.20. April was revised lower from 121.70 to 117.50.

This news supported the Fed’s claim that the rise in inflation would be temporary and the economy still needs monetary policy support due to expectations of a fragile recovery.

Steady Flow of Dovish Fed Speaker Comments

The recent rise in U.S. inflation is unlikely to lead to the kind of undesirably high inflation that some notable economists have warned about, the Federal Reserve Bank of Chicago President Charles Evans said on Tuesday, reiterating his support for the Fed’s super-easy policy.

“I have not seen anything yet to persuade me to change my full support of our accommodative stance for monetary policy or our forward guidance about the path for policy,” Evans said in remarks prepared for delivery to a Bank of Japan conference.

Meanwhile, Federal Reserve policymakers are “talking about talking about” reducing their support for the economy, but for now policy is in a “very good place,” San Francisco Federal Reserve Bank President Mary Daly said on Tuesday.

“We haven’t seen substantial further progress just yet,” Daily said in an interview on CNBC, referring to the bar the Fed has set before it would begin to taper its $120 billion a month in asset purchases that is helping support the economy. “It’s too early to say the job is done.”

Short-Term Outlook

There are no major economic releases from the U.S. on Wednesday so we could see some tight rangebound trading ahead of Thursday and Friday’s reports.

FOMC Member Randal Quarles is scheduled to speak at 14:00 GMT and 19:00 GMT, but I don’t expect him to say anything that could create a volatile reaction in the Dollar/Yen.

On May 18, Quarles told lawmakers a strong economic recovery is underway in the United States, but is not yet complete. That tell me he is dovish and thinks the Fed should continue with its loose monetary policy.

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