USD/JPY Fundamental Daily Forecast – Lower Treasury Yields Encouraging Profit-Taking

The Dollar/Yen is trading lower on Tuesday as investors take profits after posting a stellar run since the week-ending January 8. Today’s early weakness is being fueled by a slight dip in U.S. Treasury yields and increasing demand for higher risk assets.

The Forex pair started the week on a bullish note as traders continued to respond to Friday’s robust U.S. jobs report and the passage of President Joe Biden’s $1.9 trillion coronavirus package over the weekend. Additionally, the 10-year U.S. Treasury yield traded near the 1.6% level early Monday. This helped widen the spread between U.S. Government bond and Japanese Government bond yields, making the U.S. Dollar a more attractive asset.

At 09:28 GMT, the USD/JPY is trading 108.697, down 0.226 or -0.21%.

Today’s early price action suggests investors are starting to position themselves ahead of the March 17 U.S. Federal Reserve monetary policy announcements.

The Fed holds a two-day meeting next week. Although expectations are low that the central bank will announce major policy changes after Chair Jerome Powell last week did not express concern about the rise in bond yields.

Economic News

Japanese household spending dropped 6.1% in January from a year earlier, government data showed on Tuesday, compared with economists’ median estimate of a 2.1% decline.

Separate data showed real wages dropped for the 11^th straight month in January, although at a slower pace than in the prior month, as the pandemic continued to pressure corporate profits.

Japan’s economy expanded at a slower-than-initially-reported pace in October-December, with firms tightening spending on plant and equipment as the coronavirus pandemic clouded their business plans.

The slower growth was mainly due to a sharper contraction in private inventories and capital expenditure spending less than previously thought in the fourth quarter, even as exports remained solid.

The economy grew an annualized 11.7% in October-December, weaker than the preliminary reading of 12.7% annualized growth to mark the second straight quarter of growth, Cabinet Office data showed Tuesday.

Capital spending grew 4.3% from the previous quarter, lower than a preliminary 4.5% rise, but outpacing the median forecast for a 4.1% increase.

Short-Term Outlook

The direction of the USD/JPY will be determined by the movement in U.S. Treasury yields and demand for riskier assets. Lower yields will encourage investors to take profits. Traders are also beginning to pare positions ahead of the next week’s Fed meeting.

The Bank of Japan will conduct a review of its policy tools next week to make them more “effective and sustainable” as the pandemic forces it to keep its radical stimulus program in place longer than originally expected. BOJ officials may also address the recent surge in bond yields.