USD/JPY Fundamental Daily Forecast – Japanese Yen Weakens as Risk Sentiment Improves on Powell Comments

The Dollar/Yen is trading higher early Wednesday, following through to the upside after U.S. equity markets mounted a huge recovery the previous session. On Monday, the Forex pair fell sharply as U.S. stocks weakened, but rebounded yesterday after upbeat comments about inflation by Fed Chairman Jerome Powell.

At 05:13 GMT, the USD/JPY is trading 105.492, up 0.226 or +0.22%.

The price action indicates Dollar/Yen investors are closing monitoring the movement in government bond yields rather than domestic economic data.

USD/JPY Reverses Early Weakness on Stock Market Rebound

The USD/JPY turned higher on Tuesday after Wall Street reversed its losses late in the session, with the S&P 500 and the Dow reclaiming positive territory by the close in a tug-of-war between stocks that thrived amid lockdowns and those that stand to benefit the most from a reopening economy.

Fed Chair Powell Downplays Inflation Concerns

The catalysts behind the turnaround in the U.S. stock market and the Dollar/Yen were comments from Fed Chair Jerome Powell. He triggered the move by pushing back against concerns that the central bank’s economic support increased the risk of spiraling inflation, and insisted that the central bank’s accommodative monetary policy would remain in place for “sometime.”

Testifying before the Senate Banking Committee, Powell said the economic recovery was “uneven and far from complete,” adding that investors are mostly responding to an anticipated rebound as vaccine deployment curbs the pandemic.

“Powell’s primary objective appears to clearly be to support economic growth, even at the potential expense of higher inflation,” said David Carter, chief investment officer at Lenox Wealth Advisors in New York.

Treasury Futures Finish Higher after Powell Says Inflation is Still ‘Soft’

June 10-year U.S. Treasury Notes finished higher on Tuesday after Fed Chair Jerome Powell indicated that the central bank was not moving toward changing its dovish policy stance. Yields move inversely to prices. Powell’s comments triggered the turnaround in stocks which helped dampen the Japanese Yen’s appeal as a safe-haven asset.

The Fed chief said in prepared testimony that “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”

Daily Forecast

Powell will testify before Congress a second time on Wednesday. Demand for risky assets could soar if he continues to present a dovish tone about the economy. This could provide further support for the Dollar/Yen.

Money could come back into the Japanese Yen if there is a considerable drop in U.S. Treasury yields.

For a look at all of today’s economic events, check out our economic calendar.