USD/JPY Fundamental Daily Forecast – Long Liquidation Continues after Powell Sounds Dovish Alarm

The Dollar/Yen is trading lower early Thursday, following-through to the downside after a steep break the previous session was fueled by dovish comments from Federal Reserve Chairman Jerome Powell. On Wednesday, Powell reassured investors that he was in no rush to tighten policy.

Powell said in testimony before Congress that high inflation seemed linked to reopening, that it would be a mistake to act prematurely to tame it and that tapering bond buying was “still a ways off”.

At 05:06 GMT, the USD/JPY is trading 109.838, down 0.100 or -0.09%.

The spread between U.S. Government bond yields and Japanese Government bond yields tighten on the news, making the U.S. Dollar a less-attractive investment.

Fed’s Powell Sticks to Script on Jobs Recovery, Feels Heat on Inflation Front

Federal Reserve Chair Jerome Powell on Wednesday pledged “powerful support” to complete the U.S. economic recovery from the coronavirus pandemic, but faced sharp questions from Republican lawmakers concerned about recent spikes in inflation, Reuters reported.

In testimony to the U.S. House of Representatives Financial Services Committee, Powell said he is confident recent price hikes are associated with the country’s post-pandemic reopening and will fade, and the Fed should stay focused on getting as many people back to work as possible.

Any move to reduce support for the economy, by first slowing the U.S. central bank’s $120 billion in monthly bond purchases, is “still a ways off,” Powell said, with 7.5 million jobs still missing from before the pandemic.

“The high inflation readings are for a small group of goods and services directly tied to the reopening,” Powell testified, language that indicated he saw no need to rush the shift towards post-pandemic policy. The Fed at this point expects to continue its bond buying until there is “substantial further progress” on jobs, with interest rates pinned near zero likely until at least 2023.

Daily Forecasts

Powell’s testimony means the monetary taps will stay open and interest rates will stay low. Bond traders were right in driving down yields to February lows. The Dollar/Yen bulls were wrong in betting on an early tapering from the Fed. So the USD/JPY has to go down over the short-run because it is overpriced relative to the yield level.

Look out to the downside if the 10-year U.S. Treasury yield falls below its July 8 close at 1.30%.