USD/JPY Fundamental Daily Forecast – Sellers Guided by Treasury Yield Plunge

The Dollar/Yen is down sharply on Friday as the spread between U.S. Government bonds and Japanese Government bonds widened, making the Japanese Yen the more attractive currency. The move is being fueled by another drop in U.S. Treasury yields overnight. The catalyst behind the price action is safe-haven buying.

At 07:25 GMT, the USD/JPY is trading 135.048, down 0.684 or -0.50%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.95, up $0.42 or +0.61%.

Economic Data Weighs on Yields

U.S. Treasury yields are down for a third straight session early Friday, pushing the dollar lower against the Yen as investors continue to assess the economic outlook amid rising recession fears. As the third quarter begins on Friday, concern over a slowing economy and aggressive interest rate hikes from the Federal Reserve continue to dominate market sentiment.

Economic data this week fueled two big downswings. On Wednesday it was the Conference Board’s consumer confidence reading, which came in at 98.7, below Dow Jones’ consensus estimates of 100.

The Conference Board’s one-year ahead inflation expectations, which reached a high of 8.0%, exceeding the 7.7% seen in June 2008, while the Richmond Fed’s manufacturing index came in at -19, its lowest since May 2020 and well below consensus expectations of -7.

On Thursday, the core personal consumption expenditures price index, the Fed’s preferred inflation measure, rose 4.7% in May, according to the Commerce Department. The Chicago PMI, which tracks business activity in the region, came in at 56, slightly below a StreetAccount estimate of 58.3.

Fed Remarks Spread Fear

Traders were also responding to remarks from Federal Reserve officials. On Wednesday, Federal Reserve Bank of Cleveland President Loretta Mester said she will advocate for a 75 basis point hike at the central bank’s July meeting if economic conditions remain the same by then.

Fed Chairman Jerome Powell on Wednesday said that policymakers would not allow inflation to take hold of the U.S. economy over the longer term. Speaking at a European Central Bank forum, Powell said it’s important to arrest long-term inflation expectations so that they don’t become entrenched and create a self-fulfilling circle.

US Manufacturing PMI, Construction Spending Sets the Tone

USD/JPY traders will be watching today’s ISM Manufacturing PMI and Construction Spending reports for clues about the strength of the economy. Weak data will likely drive yields lower, and consequently the Dollar/Yen.

The mindset has flipped in the market. For weeks, expectations for Fed rate hikes were driving the U.S. Treasury yields and the U.S. Dollar higher. Now that we’ve seen signs of weakness in the economy and the stock market, investors are moving money into the safe-havens like Treasury bonds, the U.S. Dollar and the Japanese Yen.

Today’s economic reports ahead of a long U.S. holiday weekend could create volatile conditions. Be prepared for heightened volatility.