USD/JPY Fundamental Daily Forecast – Rising Yields, Demand for Risk Driving Price Action

The Dollar/Yen is trading higher on Thursday, helped by an easing of tensions between the United States and Iran, and signs of a strengthening U.S. labor market. Also providing a boost for the Forex pair is a sharp rise in U.S. Treasury yields and increasing demand for higher-risk assets. The Dollar/Yen is also being driven higher by a bullish chart pattern, following Wednesday’s closing price reversal bottom.

At 14:32 GMT, the USD/JPY is trading 109.500, up 0.359 or +0.33%.

Tensions Ease between the U.S. and Iran

The USD/JPY extended Wednesday’s rally as tensions between the U.S. and Iran eased following an escalation of the conflict stemming from a U.S. airstrike on Thursday that killed a prominent Iranian Major General.

The Dollar/Yen began the rally following a steep break on Wednesday that was triggered by Iran’s retaliatory attacks on military bases housing U.S. troops in Iraq.

The catalyst behind the rebound was a calming speech by President Donald Trump who pledged sanctions against Iran rather than military action. Earlier in the session, an Iranian official said the missile attack concluded their response, easing fears of wider conflict in the Middle East and prompting a sell-off in safe-haven assets like gold.

U.S. Labor Market Strengthening

The USD/JPY was further boosted on Wednesday by a better-than-expected private sector jobs report. The ADP National Employment Report on Wednesday showed private payrolls jumped by 202,000 jobs last month, the largest gain since April, after an upwardly revised 124,000 rise in November. Private job growth averaged 163,000 jobs per month in 2019, slowing from an average increase of 219,000 in 2018.

Economists polled by Reuters had forecast private payrolls advancing 160,000 last month following a previously reported 67,000 rise in November.

On Thursday, the Dollar/Yen was able to extend its rally after a report showed new applications for U.S. jobless benefits fell more than expected last week. Initial claims for state unemployment benefits dropped 9,000 to a seasonally adjusted 214,000 for the week-ended January 4. Economists polled by Reuters had forecast claims would decrease to 220,000 in the latest week.

Treasury Yields Rise as Traders Unwind Safe-Haven Hedges

Treasury yields rose on Thursday as investors unwound safe-haven hedges in U.S. Government bonds placed as protection against an escalation of the conflict between the United States and Iran. The jump in yields helped make the U.S. Dollar a more attractive investment.

Daily Forecast

Traders should continue to look for heightened volatility in the USD/JPY as investors continue to feel uneasy about the situation in the Middle East. However, we’re likely to continue to see an upside bias if Treasury yields and demand for risky assets continues to rise.

Traders are now preparing for the release of the U.S. Non-Farm Payrolls report on Friday. In the absence of any renewed conflicts in the Middle East, the jobs report is likely to set the tone in the USD/JPY on Friday and early next week.