USD/JPY Fundamental Daily Forecast – Showing Renewed Strength in Reaction to Spike in Treasury Yields

The Dollar/Yen is trading higher on Thursday, erasing nearly all of its losses from the previous session as the U.S. 10-year Treasury yield rose to 1.74% for the first time since January 2020, up around 10 basis points on the day. The move widened the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive asset.

At 09:00 GMT, the USD/JPY is trading 109.122, up 0.267 or +0.24%.

The surge in yields is being attributed to positive comments about the economy from the Federal Reserve on Wednesday. The Fed said it expected higher economic growth and inflation in the U.S. this year and repeated its pledge to keep its target interest rate near zero.

What the Fed didn’t say is that it’s uncomfortable with rising Treasury yields. The markets have grown skittish lately over worries that inflation pressures and rising yields may be posing a bigger danger than the Fed thinks.

The Fed is comfortable with some increase in yields so long as they are doing so in response to economic growth. The Fed considers 2% inflation a healthy level for the economy while also giving the central bank breathing room for policy. Should inflation get out of control, Fed officials believe they have the tools to control it.

In recent weeks, there had been some market expectations that the committee might adjust the asset purchase program to buy more long-dated bonds to push down rates farther out on the curve, but there was no indication of that in Wednesday’s decision.

Daily Forecast

The Fed seems to have greenlit another rally in Treasury yields which is very supportive for the U.S. Dollar.

The minor range is 108.340 to 109.362. The USD/JPY is currently trading on the strong side of its pivot at 108.851.

If buyers can establish support at 108.851 then it could generate the momentum needed to challenge this week’s high at 109.362. Taking this out this level could trigger a move into the June 5, 2020 main top at 109.849.

A failure to hold 108.851 will be an early sign of weakness. This could trigger a move into 108.340 to 108.230. However, we’re not likely to get there unless Treasury yields weaken.