USD/JPY Fundamental Daily Forecast – Technical Buying, Firmer Treasury Yields Underpinning Dollar/Yen

The Dollar/Yen is inching higher early Monday on technical buying and weaker U.S. Treasury futures. This means yields are firming. The Japanese Yen is showing no reaction to the Bank of Japan’s Tankan Business Sentiment data, which showed a slight dip in big Japanese manufacturers’ sentiment.

At 0530 GMT, the USD/JPY is trading 110.910, up 0.223 or +0.20%.

Technically, the market has moved above last week’s high and to the strong side of a Fibonacci retracement level at 110.859. If the technical upside momentum continues, we could see a test of the last major top at 111.396. Initially, this price could act as resistance, but it is also the trigger point for an acceleration to the upside.

The Dollar/Yen has been supported since early last week by the relative strength in the U.S. economy and expectations of further rate hikes from the U.S. Federal Reserve.

Fresh economic data from Friday is also providing some support. The so-called Core Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred gauge of U.S. inflation, rose 2.0 percent from a year earlier, the biggest gain since April 2012. This news helped raise the chances of at least one more Fed rate hike this year, and possibly two.

Investors are still keeping an eye on possible disruptions to economic growth from the trade disputes between the United States and its major trading partners. However, economists are saying the direct economic damage from Trump’s tariffs have been relatively contained, at least for now. The price action in the USD/JPY reflects this assessment. In my opinion, the Dollar/Yen will be the first Forex pair to tell us if trade war fears are legitimate.

Forecast

In Japan early Monday, the Tankan Manufacturing Index was reported at 21, lower than the 22 estimate the previously reported 24. The Tankan Non-Manufacturing Index came in higher than expected at 24. Traders showed no reaction probably because the reports offset each other.

Final Manufacturing PMI was 53.0, lower than the 53.1 forecast and previous read.

Later today, investors will get the opportunity to react to the latest economic data from the United States.

At 1345 GMT, Final Manufacturing PMI is estimated at 54.6, unchanged. The major report for the day will be released at 1400 GMT. ISM Manufacturing PMI is expected to come in at 58.2, slightly below the previously reported 58.7.

Also at 1400 GMT, look for reports on Construction Spending (+0.5% versus +1.8%) and ISM Manufacturing Prices (74.3 versus 79.5).

The USD/JPY will continue to move higher if the ISM Manufacturing PMI report comes in better than expected. Gains could be limited, or prices could retreat on a weaker number, however, the entire rally is not likely to be derailed unless the number declines enough to raise questions about the pace of Fed rate hikes this year.