USD/JPY Fundamental Daily Forecast – Pressured by Fed Decision, but Whip-Sawed by Overnight Yield Volatility

The Dollar/Yen is trading slightly better early Thursday following a sharp break the previous session. Today’s early move is being fueled by a slight recovery in U.S. Treasury yields, which plunged after the U.S. Federal Reserve issued its monetary policy statement that financial market traders construed as dovish.

At 01:22 GMT, the USD/JPY is trading 109.033, up 0.177 or +0.16%.

Fed Sees Stronger Economy and Higher Inflation, but No Rate Hikes

Treasury yields plunged after the Federal Reserve on Wednesday sharply ramped up its expectations for economic growth but indicated that there are no interest rate hikes likely through 2023 despite an improving outlook and a turn this year to higher inflation. The news tightened the spread between U.S. Government bond and Japanese Government bond yields, making the U.S. Dollar a less-attractive asset, while driving up demand for the Japanese Yen.

Fed Chairman Jerome Powell also said he expects that inflation will rise this year due in part to soft year-over-year comparisons from the early days of the COVID-19 pandemic in early 2020. However, he said that won’t be enough to change a policy that seeks inflation above 2% for a period of time if it helps to achieve full and inclusive employment.

“I would note that a transitory rise in inflation above 2% as seems likely to occur this year would not meet our standard,” Powell said.

The Fed’s post-meeting statement continued to indicate that policy will remain loose until “substantial further progress” is made toward its dual goals of full employment and price stability.

The Fed also indicated that it is comfortable with some increase in yields so long as they are doing so in response to economic growth.

Japan Exports Fall as China, US Demand Weakens

Japanese exports fell much faster than expected in February as U.S. and China-bound shipments weakened, a source of concern for the world’s third-largest economy as it tries to prop up growth.

The prospects for a U.S. recovery may ease concerns about the outlook for Japan’s economy, however, which is seen slowing in the current quarter due to new COVID curbs that have hit service-sector activity.

Ministry of Finance data out on Wednesday showed Japanese exports fell 4.5% year-on-year in February, hurt by decline in U.S.-bound shipments of automobiles.

In Turning Point for Kuroda, BOJ May Phase Out Asset-Buying Goal

The Bank of Japan may phase out a numerical target for its risky asset buying at a policy review on Friday, highlighting the rising cost of prolonged easing and marking a turning point for Governor Haruhiko Kuroda’s massive stimulus program, Reuters reported.