USD/JPY Fundamental Daily Forecast – Japan Upgrades First Quarter GDP, but Economy Still in Contraction

The Dollar/Yen is trading higher early Tuesday after a minor setback the previous session. There was domestic news overnight, but most of the price action the past two sessions has been primarily position-squaring ahead of Thursday’s U.S. consumer inflation report.

At 07:58 GMT, the USD/JPY is trading 109.523, up 0.267 or +0.24%.

Currently the Forex pair is trading inside a technical retracement zone at 109.223 to 109.634. This suggests it has found the “sweet spot” on the chart, where it’s not “too hot, or not too cold”.

Since late May the Dollar/Yen has found strength on the notion that the Federal Reserve would begin discussing tapering its bond purchase stimulus. However, since last Friday’s steep drop, it has settled into a range.

Friday’s U.S. non-farm payrolls miss seems to have cooled the idea that the economy was heating up enough for policymakers to make some sooner-than-anticipated changes.

By becoming rangebound, Dollar/Yen traders are saying they are not too sure about the Fed’s next move ahead of the central bank’s two-day meeting on June 15-16. Thursday’s U.S. consumer price index report is expected to shed some light on the Fed’s next move.

On Thursday, June 10, investors will get the opportunity to react to the latest CPI and Core CPI reports. Consumer inflation for May is expected to have risen by 0.4%, down from 0.8% in April. Core CPI is expected to have risen by 0.4%, down from 0.9% in April.

Japan Economic News

Japan’s economy shrank less than initially reported in the first quarter on smaller cuts to plant and equipment spending, but the coronavirus pandemic still dealt a huge blow to overall demand.

The economy shrank by an annualized 3.9% in January-March, not as bad as the preliminary reading of a 5.1% contraction, but still posting the first fall in three quarters, Cabinet Office data showed Tuesday.

The reading, which beat economists’ forecast for a 4.8% decline, equals a real quarter-on-quarter contraction of 1.0% from the prior quarter, versus a preliminary 1.3% drop.

Other data showed growth in bank lending slowed sharply in May, while real wages posted the biggest monthly jump in more than a decade in April, in signs that the world’s third-largest economy was gradually overcoming last year’s pandemic hit.

Additionally, capital spending shrank 1.2% from the prior quarter, better than a preliminary 1.4% decrease, and matching the median forecast for a 1.2% loss. Government consumption fell 1.1%, a smaller drop than a preliminary 1.8% decline.

Finally, private consumption, which makes up more than half of gross domestic product, dropped 1.5% from the previous three months, worse than the initial estimate of a 1.4% drop.

Daily Outlook

With Treasury yields expected to remain rangebound throughout Tuesday’s session, we’re expecting more sideways trading in the USD/JPY. If there is going to be intraday volatility, the source is likely to be the U.S. JOLTS Job Openings report.

It is expected to come in at 8.18 million versus the previously reported 8.12 million. The 0.6 million increase in job openings is actually good for the U.S. Dollar because it suggests a growing economy.