USD/JPY Fundamental Daily Forecast – Hawkish Powell Could Drive Dollar/Yen into 113.381 to 113.745 Over Near-Term

The Dollar/Yen soared on Tuesday to its highest level since January 9, driven by firmer U.S. Treasury yields and increased demand for risky assets. The catalysts behind the rally were the hawkish congressional testimony of U.S. Federal Reserve Chairman Jerome Powell and strong U.S. economic data.

On Tuesday, the USD/JPY settled at 112.881, up 0.605 or +0.54%.

U.S. Treasury yields rose slightly yesterday after Powell testified about the state of the economy and monetary policy before a congressional sub-committee. His comments helped widen the spread between U.S. Government bond yields and Japanese Government bond yields. This helped make the U.S. Dollar a more desirable investment.

The yield on the benchmark 10-year Treasury note inched higher to 2.864 percent, while the yield on the 30-year Treasury bond rose to 2.971 percent. The short-term two-year Treasury note yield hit a new high of 2.619 percent, its highest level since August 6, 2008 when the two-year yielded as high as 2.644 percent.

During his semiannual monetary policy report to the Senate Banking Committee on Tuesday, Powell said the economy is strong enough to handle tighter monetary policy. He noted:  “Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate.” Powell also said growth in the second quarter was “considerably stronger than in the first.”

Powell also talked about the ongoing trade disputes between the United States and its major trading partners in China and the European Union. He said there is a “rising chorus of concern” from businesses over rising tariffs. “In general, countries that have remained open to trade, that haven’t erected barriers including tariffs, have grown faster, they have higher incomes, higher productivity,” he said.

Forecasts

The reaction in the financial markets to Powell’s testimony indicates that investors were happy with the economy and the Fed’s “gradual” pace of interest rate hikes. Powell’s hawkish tone also supported the divergence in monetary policies between the Fed and the dovish Bank of Japan.

The hawkish tone is continuing early Wednesday with the USD/JPY trading at 113.032, up 0.151 or +0.13% at 0647 GMT. Furthermore, the Forex pair is now in a position to test a series of three tops from December to January at 113.381, 113.631 and 113.745. Overtaking these levels could send the Dollar/Yen soaring to the next top at 114.728.

On Tuesday, economic news also helped underpin the USD/JPY with U.S. Industrial Production coming in at 0.6%, higher than the 0.5% forecast. Later today at 1230 GMT, this trend could continue with the release of reports on building permits and housing starts. June Building Permits are forecast to have risen by 1.33M units and June Housing Starts by 1.32M units. The Fed will also release its Beige Book at 1800 GMT. It is a report on East Coast manufacturing.

At 1400 GMT, Fed Chair Powell concludes his congressional testimony. He could be pushed harder on the impact of tariffs for a second day, especially by the Democrats on the Senate Banking Committee. Being a data-dependent Fed member, he’s not likely to get specific about the impact of the trade disputes until he sees some real numbers.