USD/JPY Fundamental Daily Forecast – Needs Sold GDP Report to Sustain Rally

The Dollar/Yen is trading slightly better after the release of the Bank of Japan’s interest rate decision and monetary policy announcement. And shortly before the release of the first quarter U.S. GDP report. Traders are also monitoring the meeting between North and South Korean leaders.

At 0915 GMT, the USD/JPY is trading 109.309, up 0.014 or +0.01%.

The Bank of Japan kept monetary policy steady on Friday and removed a phase on the time frame for achieving its 2 percent inflation target, suggesting it is in no rush to reach its elusive price goal with the economy in good shape.

As widely expected, the Bank of Japan maintained a pledge to guide short-term interest rates at minus 0.1 percent and the 10-year bond yield around zero percent. The decision was made by an 8-1 vote with board member Goushi Kataoka dissenting.

In a quarterly review of its projections, the BOJ left its inflation forecast for next fiscal year unchanged from three months ago, at 1.8 percent.

It also projected inflation of 1.8 percent for the following fiscal year ending in March 2021, underscoring its view a strengthening recovery will help sustain price growth toward its target.

In a surprise move, however, the BOJ removed a phase on the timing for achieving its price target in an acknowledgement that meeting the goal was taking more time than expected.

Forecast

The direction of the USD/JPY today is likely to be determined by trader reaction to the GDP report. It is expected to show the U.S. economy grew 2.0%. This is lower than the previously reported 2.9%.

This report is important because U.S. Treasury investors will need it to justify this week’s rapid rise in yields.

This week, the benchmark 10-year U.S. Treasury yield climbed slightly above the psychological 3% level. If the GDP report comes in above the 2% estimate then yields could spike to the upside. This would drive the USD/JPY sharply higher.

If the GDP comes in below the 2% estimate then yields could drop, triggering a sell-off in the USD/JPY.

Traders are focused at this time on any numbers that could signal a shift higher in inflation, so employment costs and price data in GDP could be market movers if they surprise higher or lower. Employment costs are expected to rise 0.7 percent, compared with a 0.6 percent gain in the fourth quarter.

A report on consumer sentiment will also be released at 1400 GMT.