USD/JPY Fundamental Daily Forecast – Reaction to GDP, Weekly Initial Claims Sets the Tone on Thursday

The Dollar/Yen is inching higher early Thursday after finishing strong the previous session. The catalyst behind the move were the minutes of the Federal Reserve’s last meeting in early May. The minutes didn’t offer any surprises but they did support the idea that has been driving the price action for weeks that policymakers are set to raise rates aggressively in June and July.

We expect the Fed to stay the course in June and July, but closely monitor three key components of the economy:  inflation, jobs and manufacturing. The Fed wants to see inflation come down, but jobs and manufacturing to hold steady-to-better.

Central bankers are likely to reserve the right to tighten policy more aggressively if inflation continues to rise, and to take their foot of the gas pedal if employment and manufacturing stumble.

On Wednesday, the USD/JPY settled at 127.312, up 0.446 or +0.35%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) finished at $73.58, down $0.23 or -0.31%.

Fed Minutes:  50-Basis Point Rate Increases Appropriate in June and July to Curb Inflation

“All participants concurred that the U.S. economy was very strong, the labor market was extremely tight, and inflation was very high,” the minutes said, with risks of even faster inflation “skewed to the upside” given ongoing global supply problems, the Ukraine war, and continued coronavirus lockdowns in China.

In that context, “participants agreed that the (Federal Open Market) Committee should expeditiously move the stance of monetary policy toward a neutral posture … They also noted that a restrictive stance of policy may well become appropriate.”

“Many participants” judged that getting rate hikes in the books now “would leave the Committee well positioned later this year to assess the effects of policy firming.”

BOJ’s Kuroda Says Surging Global Inflation Among Challenges for Central Banks

Bank of Japan Governor Haruhiko Kuroda said on Wednesday a “global surge” in inflation was among key challenges for central banks, which will likely lead to differing monetary policy responses from country to country.

The current rise in inflation is driven by both supply constraints and a strong rebound in demand seen in some countries after the pandemic-induced slump, Kuroda said.

Daily Forecast

With the Fed minutes in the books, trader focus will now shift back to U.S. economic data, which will ultimately determine the future aggressiveness of the central bank.

On Thursday, the key report will be the US Preliminary GDP, due to be released at 12:30 GMT. Traders are expecting the U.S. economy to have lost 1.3% in the first quarter, a slight improvement from the previously reported 1.4% decline.

Weekly unemployment claims are expected to come in at 217K versus last week’s 218K reading.

Sustaining economic growth and job gains are two of the Fed’s major concerns so Thursday’s number could influence the direction of Treasury yields and consequently the direction of the USD/JPY.

Weak data will likely have the biggest influence of Treasurys. If yields drop then look for the USD/JPY to decline. Strong data will likely lead to steady yields and a stable Dollar/Yen.