USD/JPY Fundamental Daily Forecast – Pressured by Falling Treasury Yields, Lower Demand for Risk

Later today in the U.S., investors will get the opportunity to react to data on Import Prices and Weekly Unemployment Claims. However, the direction of the USD/JPY will be primarily driven by Treasury yields and stock prices. Lower yields should keep the pressure on the Dollar/Yen. Increased demand for equities will be supportive for the Forex pair.
James Hyerczyk
USD/JPY

The Dollar/Yen is trading lower on Thursday amid another rise in U.S. Treasury yields and lower demand for risky assets. The Forex pair has been mostly rangebound for nearly two weeks, or since the stock market began its six-session rebound. That move correlated with Federal Reserve Chairman Jerome Powell’s vow to do what it takes to protect the current economic expansion.

At 06:12 GMT, the USD/JPY is trading 108.295, down 0.200 or -0.18%.

The current price action suggests that investors are trying to figure out how to play current market conditions. Lower Treasury yields have been weighing on the Forex pair because they tend to weaken demand for the U.S. Dollar. However, the recent strength in the stock market has fueled the carry trade, which tends to be supportive for the U.S. Dollar.

Barring another steep drop in Treasury yields that drives U.S. Government bonds through last week’s high, and another plunge in the U.S. stock market, the USD/JPY is likely to remain rangebound until after the Fed’s two-day meeting concludes on June 18.

Treasury Yields Fall After Report Shows Muted Inflation

U.S. government debt yields retreated on Wednesday after a government report showed that consumer inflation moved only slightly higher in May. By the end of the session, 10-year Treasury note yields were at 2.12%, and the yield on the 30-year Treasury bond was at 2.618%.

The U.S. Labor Department reported that consumer prices rose a seasonally adjusted 0.1% in May. Core CPI also rose 0.1%. Both prints fell below expectations. Year-over-year, prices rose 1.8%, while core prices increased 2%. The report supports the Fed’s case for a rate cut later this year.

This news weakened demand for the U.S. Dollar as investors increased the odds of a Fed rate hike. Policymakers are not likely to lower rates in June, by market expectations for lower rates by July were at 85.3% on Wednesday, according to the CME Group’s FedWatch tool.

U.S. Stock Market Rally Stalls

Stocks weakened for a second session on Wednesday, pressured by declines in technology and bank shares. Weaker stocks triggered the carry trade, whereby investors sold stocks, sold dollars and bought Yen to pay back cheap loans from Japanese banks.

Other News

In Japan, the BSI Manufacturing Index came in at -10.4, worse than the previous month’s -7.3 reading, and below the 4.5 forecast

Also in Japan, the 30-year Bond Auction showed the yield came in at 0.32 percent. This was lower than the previous 0.53 yield.

Tertiary Industry Activity rose 0.8%, beating the 0.4% forecast. The previous month was revised higher to -0.2%.

Daily Forecast

Later today in the U.S., investors will get the opportunity to react to data on Import Prices and Weekly Unemployment Claims.

However, the direction of the USD/JPY will be primarily driven by Treasury yields and stock prices. Lower yields should keep the pressure on the Dollar/Yen. Increased demand for equities will be supportive for the Forex pair.

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