USD/JPY Fundamental Daily Forecast – Strong US Economic Data Renews Bullish Tone Ahead of Friday’s NFP Report

The Dollar/Yen is edging higher early Thursday as traders continue to monitor the movement in U.S. Treasury yields. With the movement in yields data dependent until the Fed makes its next interest rate decision on September 21, we’re expecting to see heightened volatility as investors make adjustments as to the size of the next Fed rate hike.

Short-Term Recap: Treasury Yield Movement Sets Tone

Late last week and earlier this week, the bets were rising for the Fed to reduce its next rate hike to 50 basis points. This drove down U.S. Treasury yields and consequently the Dollar/Yen as the interest rate differential between U.S. government debt and Japanese government debt tightened.

The Dollar/Yen mounted a strong rebound on Tuesday after a trio of Fed officials said they supported the need for aggressive interest rate hikes until the central bank drives inflation down to its 2% mandate. The Forex pair received a further boost on Wednesday, following the release of stronger-than-expected U.S. Services PMI data.

At 06:11 GMT, the USD/JPY is trading 134.209, up 0.346 or +0.26%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.83, down $0.45 or -0.64%.

 All Moves Data Dependent until Fed’s September Meeting

Traders are going to have to deal with the possibility of heightened volatility until the Fed’s next meeting on September. From now until then, the major reports that will garner the most attention are July and August Non-Farm Payrolls and July and August Consumer Inflation.

The Fed is mandated to get inflation down to 2%. They are not going to be able to do this unless they continue to raise interest rates. There may be some casualties during the process like slower growth or even rising unemployment, but this isn’t going to stop them. The only decision will be should the next rate hike be 50 basis points or 75 basis points.

The placing of bets on either 50 or 75 basis points will create the volatility in the USD/JPY. The longer-term trend will remain bullish as long as the Fed is hawkish and the Bank of Japan is dovish. The short-term trend will be determined by trader expectations of the size of the next rate hike.

Daily Forecast

Traders have more U.S. economic data to deal with on Thursday, but the reactions may be muted due to Friday’s release of the July Non-Farm Payrolls report.

Today’s releases include Challenger Job Cuts, Weekly Unemployment Claims and the Trade Balance.

FOMC Member Loretta Mester is also scheduled to speak. On Tuesday she rang the hawkish bell saying, the Federal Reserve has further to go on raising rates as inflation has not even peaked yet.

“We have more work to do because we have not seen that turn in inflation,” Mester said in an interview with the Washington Post. “It’s got to be a sustained several months of evidence that inflation has first peaked – we haven’t even seen that yet – and that it’s moving down.

Look for an upside bias to develop today after Mester speaks at 16:00 GMT if she continues with her hawkish comments.