USD/JPY Fundamental Daily Forecast – Price Action Controlled by Treasury Yields

The Dollar/Yen is trading slightly lower early Friday after confirming yesterday’s potentially bullish technical closing price reversal bottom. The current two-sided price action is being fueled by wild swings in U.S. Treasury yields in reaction to Wednesday’s dovish remarks from Federal Reserve Chairman Jerome Powell and Thursday’s better-than-expected U.S. consumer inflation report.

At 03:00 GMT, the USD/JPY is trading 108.390 or -0.105 or -0.10%.

On Wednesday and early Thursday, the USD/JPY was pressured after comments from Federal Reserve Chairman Jerome Powell supported the case of an interest rate cut at the end of the July. On the back of Powell’s remarks, the financial markets are pricing in a 25-basis point rate cut, but some investors began to price in a 50-basis point rate cut.

The Forex pair reversed to the upside on Thursday after the release of better-than-expected consumer inflation data tempered the chances of a half-a-point interest rate cut.

U.S. consumer prices rose by 0.1% last month, the Labor Department said. Economists polled by Reuters expected a flat inflation reading. Core inflation, meanwhile, climbed 2.1% in the 12 months through June.

Treasury yields jumped on the news with the benchmark 10-year yield rising to 2.13% while the 2-year rate climbed to trade at 1.182%. Yields continued to rise after a Treasury Department 30-year bond auction saw weak demand. The department sold $134 billion worth of 30-year bonds. The bid-to-cover ratio, a measurement of demand, came in at 2.13. That’s well below its 12-month average of 2.27.

Earlier in the session, Japan’s Tertiary Industry Activity fell 0.2%, more than the -0.1% forecast. The previous report showed an increase of 0.8%.

Daily Forecast

Traders will be watching and reacting to U.S. Treasury yields on Friday. Rising yields will be supportive for the USD/JPY as they will widen the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment. A drop in yields will pressure the Dollar/Yen.

Demand for risky assets could also support the USD/JPY because of the carry trade.

At 04:30 GMT, Japan will release data on Revised Industrial Production. It is expected to increase 2.3%, unchanged from last month.

At 12:30 GMT, investors will the opportunity to react to the latest data on U.S. Producer Inflation. PPI is expected to have risen by 0.1%, unchanged from May. Core PPI is expected to have increased 0.2%, also unchanged from the previous month.