USD/JPY Fundamental Daily Forecast – September Fed Rate Cut Back On

With the steep drop in Treasury yields, Fed fund futures are now fully pricing two additional 25-basis point rate cuts by the Fed this year. This news is bearish for the USD/JPY. On Wednesday, the Fed cut rates 25-basis points as widely expected. However, investors were confused by remarks from Fed Chair Jerome Powell.
James Hyerczyk
Dollar/Yen USD/JPY

The Dollar/Yen is trading lower on Friday as the selling pressure continues after yesterday’s steep break. The Forex pair is within striking distance of its June 25 bottom at 106.775. This is a potential trigger point for an acceleration to the downside with the low of the year at 105.180 the next major target. Wednesday’s steep sell-off erased all of the week’s earlier gains and the Forex pair is now trading lower for the week.

At 06:46 GMT, the USD/JPY is trading 107.008, down 0.329 or -0.31%.

The selling pressure is being fueled by a combination of safe-haven buying, lower demand for risky assets and a plunge in U.S. Treasury yields.

Investors flocked into the Japanese Yen after President Donald Trump announced new tariffs on Chinese goods. The move drove U.S. stock indexes sharply lower, encouraging investors to park their money in the safe-haven Yen. The move drove the U.S. Dollar lower and the Japanese Yen higher.

The major U.S. stock indexes fell sharply on Thursday, erasing big gains from earlier in the session after Trump said he would impose an additional 10% tariff on Chinese imports to the U.S.

Trump said in a series of tweets the tariff will be imposed on $300 billion worth of Chinese goods. The levy will take effect September 1. He added later in the day those levies could go up to 25%. Trump’s comments came after a U.S. delegation met with Chinese trade officials earlier this week.

The yield on the benchmark 10-year Treasury note plummeted to its lowest level since 2016 in response to the news. The yield on the benchmark instrument reached an intraday low at 1.878%, its lowest level since November 2016. The yield on the 30-year Treasury bond, hit a low of 2.422% early in the session.

The plunge in Treasury yields helped tighten the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a less-attractive investment.

Daily Forecast

With the steep drop in Treasury yields, Fed fund futures are now fully pricing two additional 25-basis point rate cuts by the Fed this year. This news is bearish for the USD/JPY. On Wednesday, the Fed cut rates 25-basis points as widely expected. However, investors were confused by remarks from Fed Chair Jerome Powell.

To clarify, Powell never said the central bank wouldn’t lower rates in the future. He just wanted to emphasize the current cut was “insurance”. The reaction to the new tariffs is why the Fed needed to make the cut and probably more.

Traders are now bracing for a big day on the economic front although these reports aren’t likely to matter much to the Fed, given the impact of the new tariffs. The Fed knows it has to cut again in September.

At 12:30 GMT, traders will get the chance to respond to U.S. labor reports. Non-Farm Employment Change is expected to show the economy added 164K jobs in July. Average Hourly Earnings are expected to have risen by 0.2% and the Unemployment Rate is expected to have dipped to 3.6%.

The U.S. Trade Balance is expected to come in at -54.2 billion, better than the previously reported 55.5 billion.

At 14:00 GMT, Revised University of Michigan Consumer Sentiment is expected to rise slightly to 98.5 and Factory Orders are expected to come in at 0.6%

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