USD/JPY Fundamental Daily Forecast – Pushed Higher by Worries About Persistent US Inflation

The Dollar/Yen is soaring overnight, hitting a fresh two-decade high, as worries about persistent inflation drove U.S. Treasury bond yields higher.

The dollar reached a high of 133.000 Yen early Tuesday – a level not seen since April 2002 – buoyed by the 10-year Treasury yield’s rise to 3.05% for the first time in nearly four weeks. This move is being fueled by the Fed’s hawkish tone.

By contrast, equivalent Japanese yields are pinned near zero by the Bank of Japan’s yield curve control policy, with central bank governor Haruhiko Kuroda on Monday reiterating an unwavering commitment to “powerful” monetary stimulus.

At 07:53 GMT, the USD/JPY is trading 132.790, up 0.898 or +0.68%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $71.00, down $0.52 or -0.73%.

Dollar Bulls, Fed Hawks Focusing on Strong US Economy

A solid U.S. labor market report last Friday has fueled bets that upward price pressures will be around for longer, potentially forcing more aggressive action from the Federal Reserve. Its strength serves as confirmation the jobs market can withstand further tightening.

The focus now shifts to the U.S. consumer price report (CPI) due Friday. Traders are expecting it to provide more clues on the Fed’s rate-hiking path, ahead of next week’s policy decision.

BOJ’s Kuroda Likes Weak Yen, Dislikes Currency Volatility

Bank of Japan Governor Haruhiko Kuroda on Tuesday repeated his view that a weak Yen benefited the economy if its moves were not too sharp, a comment that followed the currency’s fall to a fresh two-decade low. This issue needed to be addressed because recent sharp declines in the Yen are inflating already rising prices of imported fuel and food.

BOJ’s Kuroda Continues to Sing a Dovish Tune

Traders have been selling the yen on expectations of widening interest-rate differentials between Japan and the United States, which is embarking on aggressive interest rate hikes. Kuroda reiterated that the BOJ would maintain ultra-low interest rates to support an economy still emerging from the coronavirus pandemic’s pain.

Short-Term Outlook

The bullish price action in the USD/JPY indicates that investors believe the U.S. economy is strong enough to withstand more aggressive rate hikes from the Federal Reserve. It also indicates investors believe the BOJ is not going to budge from its ultra-dovish policy.

Friday’s U.S. inflation report could alter the Fed’s approach if it shows a considerable drop in consumer inflation. However, the Street expects the report to show that inflation is not easing fast enough. This suggests the market believes the Fed will remain extremely hawkish.

Furthermore, it may take a few more inflation reports to convince the market and the Fed to alter its tightening course.

With the inflation rate falling slower than expectations, the threat of a recession low, and the Bank of Japan dovish, traders are expecting support for the Dollar/Yen over the near-term.