USD/JPY Fundamental Daily Forecast – Increased Demand for Risk Generating Upside Momentum

The Dollar/Yen is trading higher on Tuesday although the dollar is under pressure against a basket of other major currencies. Increased demand for risky assets and rising U.S. Treasury yields are the catalyst behind the rally. Encouraging reports from the trial of a vaccine for COVID-19 is improving sentiment, boosting demand for riskier assets.

At 09:57 GMT, the USD/JPY is trading 107.574, up 0.270 or +0.25%.

Despite the rise in sentiment, gains are being limited by worries over a possible second-wave of coronavirus infections. While coronavirus infection rates in many places have fallen to levels low enough to allow factories and businesses to re-open, some concern remains because the outbreak is not completely under control.

The USD/JPY was also supported on Monday as Treasury yields popped as investors cheered news that an experimental coronavirus vaccine showed promising early signs. Nonetheless, some of the optimism was tarnished after Federal Reserve Chairman Jerome Powell said the U.S. economy could shrink by more than 30% in the second quarter as the full impact of nationwide lockdowns is realized.

Japan Braces for Worst Postwar Slump as Pandemic Tips Economy into Recession

Japan’s economy slipped into recession for the first time in 4-1/2 years in the last quarter, putting the nation on course for its deepest postwar slump as the coronavirus crisis ravages businesses and consumers.

Analysts warn of an even bleaker picture for the current quarter as consumption crumbled after the government in April requested citizens to stay home and businesses to close, intensifying the challenge for policymakers battling a once-in-a-century pandemic.

“It’s near certainty the economy suffered an even deeper decline in the current quarter,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. “Japan has entered a full-blown recession.”

The world’s third-largest economy contracted an annualized 3.4% in the first quarter, preliminary official gross domestic product (GDP) data showed, less than a median market forecast for a 4.6% drop.

Economic News

Japan’s Tertiary Industry Activity fell 4.2%, worse than the -3.6% forecast. The previous month was revised lower to -0.7%.

Daily Forecast

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin will testify before the Senate Banking Committee at 14:00 GMT on Tuesday. His comments could move the markets especially if he wavers from his commentary on Sunday night. However, he seldom does so this could turn into a non-event.

In a written testimony released late on Monday, Powell describes the coronavirus pandemic as having caused “a level of pain that is hard to capture in words” and calls on Congress to do more to match the Fed’s historic stimulus measures. He adds that the central bank is committed to using its “full range of tools” to support the economy.

On the data front,  and building permits numbers for April are due at 12:30 GMT on Tuesday.