USD/JPY Fundamental Daily Forecast – Pushed Higher as Investors Bet US Economy will Outperform Japan

The Dollar/Yen closed higher on Friday, touching its highest level since June 5, 2020, as investors continued to bet the U.S. economy would outperform Japan’s economy. Powerful fiscal help from Congress combined with accelerated vaccine distribution has allowed the U.S. economy to recover faster than expected, Federal Reserve Chairman Jerome Powell said Thursday.

On Friday, the USD/JPY settled at 109.680, up 0.489 or 0.45%.

“As we make substantial further progress toward our goals, we’ll gradually roll back the amount of Treasury and mortgage-backed securities we’ve bought,” Powell told NPR’s “Morning Edition” in a live interview. “We will very gradually over time and with great transparency, when the economy has all but fully recovered, we will be pulling back the support that we provided during emergency times.”

Fed’s Accommodative Policy Underpinning Economy

In the wake of COVID-19 lockdowns just over a year ago, the Fed cut benchmark short-term borrowing rates to near zero and has been buying at least $120 billion of bonds each month.

Powell and other Fed officials have pledged to keep that accommodation in place until the economy reaches full employment and inflation is averaging around 2%. He said the U.S. has made strides in getting to those goals.

At its last meeting on March 17, the Federal Reserve sharply ramped up its expectations for economic growth but indicated that there are no interest rates hikes likely through 2023 despite an improving outlook and a turn this year to higher inflation.

Gross domestic product is expected to increase 6.5% in 2021 before cooling off in later years, according to quarterly economic projections from members of the Federal Open Market Committee. That median estimate represents an improvement from the anticipated 4.2% gain during the last round of projections in December.

Strong Pace of US Vaccinations

The U.S. has been vaccinating close to 2.5 million people per day, and hospitalization and death rates have been generally coming down even though caseloads have plateaued or are gradually rising in some states.

Fresh Stimulus to Provide Further Economic Boost

Congress has approved more than $4 trillion in stimulus over the past year and is looking at possibly another $3 trillion in future spending.

Short-Term Outlook

“In a nutshell, it’s a combination of better developments on COVID, particularly the vaccines, and also economic support from Congress. That’s really what’s driving it,” he said. “That’s going to enable us to reopen the economy sooner than might have been expected.”

Essentially, the USD/JPY is being driven by investors betting on a recovery that is expected to deliver the fastest economic growth since 1984.

For a look at all of today’s economic events, check out our economic calendar.