USD/JPY Fundamental Daily Forecast – Rally Continues after Biden, Yellen Fan Inflation Flames

The Dollar/Yen is trading at a two-week high on Wednesday, lifted by higher Treasury yields as global inflation worries flared anew.

The initial move was ignited on Monday by data showing Euro-area consumer inflation soaring to a record, but the rally gathered momentum after hawkish comments from a Fed official.

Later on Tuesday, a meeting between President Joe Biden and Federal Reserve Chair Jerome Powell, raised further concerns that signaled to traders that inflation is still the key issue. Finally, Treasury Secretary Janet Yellen also fanned the flames by admitting that she underestimated the trajectory of inflation.

At 06:39 GMT, the USD/JPY is trading 129.246, up 0.551 or +0.43%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $72.75, down $0.94 or -1.28%.

Biden Meets with Powell

U.S. President Joe Biden on Tuesday met with Federal Reserve Chair Jerome Powell to discuss historic inflation that’s draining American wallets, even as he assured the central bank chief he would have freedom from political interference, Reuters reported.

In brief remarks ahead of the meeting, Biden said he was meeting with Powell and U.S. Treasury Secretary Janet Yellen to “discuss my top priority, and that is addressing inflation.”

Yellen Takes Blame for Misjudging Inflation’s Path

U.S. Treasury Secretary Janet Yellen said on Tuesday that she was wrong in the past about the path inflation would take, but said taming price hikes is President Joe Biden’s top priority and he supports the Federal Reserve’s actions to achieve that, Reuters reported.

Asked in a CNN interview whether she was wrong to downplay the threat that inflation posed in public statements over the past year, Yellen said:  “I think I was wrong then about the path that inflation would take.”

Daily Forecast

Biden’s vote of confidence in Powell and Yellen’s admittance that she underestimated the path of inflation is doing nothing but raising more concerns about inflation. The news is helping to drive up Treasury yields, which is widening the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive investment.

Yellen also added that while she said a recent decline in core inflation data was encouraging, she noted that oil prices remained high and Europe was working on a plan to ban imports of Russian oil. This caused her to remark, “We can’t rule out further shocks.” That sounds like she expects inflation to remain high, implying the Federal Reserve is going to have to be more aggressive.

Yellen’s comments support Powell’s statement from early May. He said that despite some encouraging signs that price pressures may be peaking, the current environment is “not a time for tremendously nuanced readings of inflation,” and U.S. central bank officials will keep tightening policy until inflation comes down in “a convincing way.”