USD/JPY Fundamental Daily Forecast – Incoming Governor Ueda’s Comments Set the Tone on Monday

A combination of rising U.S. Federal Reserve interest rate expectations and dovish comments from the incoming Bank of Japan (BOJ) chief drove the Dollar/Yen sharply higher on Friday. Meanwhile, traders shrugged off hot domestic inflation data.

On Friday, the USD/JPY settled at 136.495, up 1.813 or +1.35%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $68.30, down $0.89 or -1.29%.

Widening Interest Rate Differential Makes US Dollar Attractive Investment

U.S. Treasury yields rose Friday as investors reacted to the Federal Reserve’s latest meeting minutes and the latest inflation data. The move widened the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar more attractive than the Japanese Yen.

The yield on the benchmark 10-year Treasury note rose by 6.8 basis points to 3.949%, while the yield on the 30-year Treasury bond climbed 5.9 basis point to 3.937%.

Hot US Economic Data One Reason for Dollar/Yen Surge

One of the reasons behind Friday’s surge was hotter-than-expected U.S. economic data which supported the Fed’s pledge to continue to raise interest rates until inflation is tamed enough to return to the central bank’s mandated 2%.

Cleveland Fed President Loretta Mester said Friday the Fed should raise rates higher than necessary if need be to get inflation fully under control.

The Commerce Department reported the personal consumption expenditures price index, excluding food and energy, increased 0.6% for the month, and 4.7% from a year ago. Wall Street had been expecting respective readings of 0.5% and 4.4%. The PCE price index is the Fed’s preferred measure of inflation.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 1.8% last month, exceeding forecasts for a 1.3% rise.

Fed Funds traders added to bets of at least three more rate hikes this year, with the peak rate seen in the range of 5.25%-5.5% by June.

Domestic Consumer Inflation Hits 41-Year High

Japan’s core consumer inflation hit a fresh 41-year high in January as companies passed on higher costs to households, data showed on Friday, keeping the central bank under pressure to phase out its massive stimulus program, Reuters reported.

The nationwide core consumer price index (CPI), which excludes volatile fresh food but includes energy costs, was 4.2% higher in January than a year earlier, matching a median market forecast and accelerating from a 4.0% annual gain in December.

BOJ’s New Boss Kazuo Ueda Delivers Dovish Message

Speaking in parliament, Ueda said the BOJ must maintain ultra-low rates as the recent acceleration in inflation is driven largely by rising raw import costs, rather than strong demand.

“Japan’s trend inflation is likely to rise gradually. But it will take some time for inflation to sustainably and stably achieve the BOJ’s 2% target,” he told a lower house confirmation hearing on Friday.

Traders read Ueda’s comments as dovish, helping to fuel the sharp rise in the USD/JPY on Friday.

Looking Ahead …

There is not a lot of fresh data coming out of Japan this week. But one event investors will be keying on early Monday is additional comments from BOJ Governor Designate Kazuo Ueda.

Bullish traders are hoping Ueda reiterates his dovish comments from Friday that helped send the USD/JPY to its highest level since December 20.