USD/JPY Fundamental Daily Forecast – Falling Yields Capping Gains, Easing Risk Concerns Supportive

The Dollar/Yen is trading slightly lower on Wednesday after failing to follow-through to the upside following yesterday’s strong rally. All we’ve seen is position adjustments this week following last Friday’s steep sell-off. None of the trend, counter-trend price action suggests a major shift in policy.

Helping to pressure the Forex pair today is another drop in U.S. Treasury yields. Supporting the Dollar/Yen is increasing appetite for risk. The price action is likely to remain stable as long as these two forces continue to work against themselves. Conditions could change quickly if one side begins to dominate the other.

For example, a steep drop in yields coupled with a plunge in the stock market would likely fuel a flight-to-safety rally into the Japanese Yen, while a rise in Treasury yields combined with stronger appetite for risk would be supportive for the Dollar/Yen.

At 09:33 GMT, the USD/JPY is trading 110.608, down 0.0023 or -0.02%.

Daily Forecast

The price action this week indicates that the support zone is 110.316 to 109.886. Prices have consolidated inside this zone. The new short-term range is 111.940 to 109.710. Its retracement zone at 110.825 to 111.088 is the primary upside target.

With support clearly identified as 110.316 to 109.886, the next major decision for investors will take place on a test of 110.825 to 111.088. This zone is the proverbial line in the sand that separates the bulls from the bears.

If sellers come in to defend 110.825 to 111.088 then a secondary lower top will form, setting up the USD/JPY for another attempt to break down under 109.886.

If the buying is strong enough to overcome 111.088 then this will establish the recent low at 109.710 as key support.

We already know about the Bank of Japan’s ultra-dovish policy and the Fed’s shift to a more-dovish policy so that isn’t going to change the longer-term view of the Dollar/Yen relationship. However, what we are witnessing is traders making adjustments to the rapidly plunging Treasury yields that could be signaling a rate cut by the U.S. Federal Reserve or a recession later in the year.

So we can continue to see a two-sided trade as investors make major adjustments to their U.S. Government bond and Japanese Government bond portfolios to reflect the on-going shift in investor sentiment. We could also see renewed volatility in the Forex pair if risk aversion returns.