USD/JPY Fundamental Daily Forecast – Interest Rate Differential Gives Dollar the Advantage

Rising U.S. Treasury yields and a hawkish Federal Reserve monetary policy statement helped drive the Dollar/Yen higher on Wednesday. The Japanese Yen was also under pressure after the Bank of Japan increased its buying of medium-term Japanese Government Bonds in a move seen as a warning shot against further rises in bond yields.

The USD/JPY settled at 109.175, up 0.402 or +0.37%.

 

Forecast

The Dollar/Yen continued to strengthen early Thursday after the Federal Reserve signaled its confidence about inflation and growth in the world’s biggest economy, with traders now waiting on a host of indicators including non-farm payrolls for further catalysts.

At 0641 GMT, the USD/JPY is trading 109.502, up 0.327 or +0.41%.

The Fed held its benchmark interest rate unchanged on Wednesday by said inflation is likely to rise this year, bolstering expectations borrowing costs will continue to climb under incoming central bank chief Jerome Powell.

The price action this week suggests the heavy dollar selling may have run its course, but upbeat U.S. data would be needed for the currency to rebound further.

The Fed’s message was a little hawkish. Simply stated, the Fed may be on a path to raise rates more aggressively in 2018 while the Bank of Japan is not even in a position to do so. With the BOJ being threatened by rising global interest rates, what did it do? It bought more medium-term Japanese Government Bonds. This tells me they are not ready to start raising rates. Advantage: U.S. Dollar.

On Thursday, investors will get the opportunity to react to a slew of U.S. economic report. Minor reports include Challenger Job Cuts, Preliminary Nonfarm Productivity, Preliminary Unit Labor Costs, Weekly Unemployment Claims, Final Manufacturing PMI, Construction Spending and ISM Manufacturing Prices.

The major report on Thursday is the ISM Manufacturing PMI. It is expected to come in at 58.7, slightly below the previous 59.7.