USD/JPY Fundamental Daily Forecast – Slower US Economic Growth Could Slow Pace of Fed Rate Hikes

The Dollar/Yen is inching higher early Tuesday, supported by yesterday’s late session reversal to the upside by U.S. Treasury yields.

On Monday, the dollar edged lower as traders sent mid-term U.S. Treasury yields lower following a blow to prospects for approval of Democratic climate and spending legislation in Washington and on concerns about the continued spread of the Omicron coronavirus.

At 03:00 GMT, the USD/JPY is trading 113.654, up 0.027 or +0.02%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $82.57, up $0.03 or +0.04%.

US Treasury Yields Rise Slightly as Investors Assess Omicron Risk

U.S. Treasury yields rose slightly on Monday, as investors grew concerned that omicron COVID variant will derail the recovery.

The yield on the benchmark 10-year Treasury note rose 2.6 basis points to 1.428% into the close. The yield on the 30-year Treasury bond moved 3.7 basis points higher to 1.854%.

Yield Curve Steeper as Spending Talks Break Down

Dollar/Yen traders since last Wednesday’s Federal Reserve monetary policy decisions have been whip-sawed by volatile movement in the U.S. Treasury yield curve.

The yield curve steepened on Monday after President Biden’s spending plans in Washington were dealt a blow. The yield on the three-year Treasury note was down 1.9 basis points at 0.9069% in afternoon trading, while yields on longer-term government debt rose throughout the day. The 30-year bond was up 3.5 basis points at 1.854%.

Analysts said investors partly were reacting to the stumble in Washington and trying to forecast its impact on the thinking of the U.S Federal Reserve.

Hope for Biden’s Domestic Investment Bill Crumbles

U.S. Senator Joe Manchin, a moderate Democrat who is key to President Joe Biden’s hopes of passing a $1.75 trillion domestic investment bill, said on Sunday he would not support the package, drawing sharp rebuke from the White House.

Manchin appeared to deal a fatal blow to Biden’s signature domestic policy bill, known as Build Back Better, which aims to expand the social safety net and tackle climate change.

“I cannot vote to continue with this piece of legislation,” Manchin said in an interview with the “Fox News Sunday” program, citing concerns about inflation. “I just can’t. I have tried everything humanly possible.”

He then released a statement accusing his party of pushing for an increase in the debt load that would “drastically hinder” the ability of the country to respond to the coronavirus pandemic and geopolitical threats.

Daily Forecast

Dollar/Yen took notice when Goldman Sachs trimmed its quarterly GDP forecast for 2022 in reaction to the Manchin news. This is very important because if U.S. economic growth is going to be slower, then the Federal Reserve may not have to raise interest rates as quickly in 2022. This will affect Treasurys, the yield curve and likely put a cap on the USD/JPY.