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USD/JPY Fundamental Daily Forecast – Tight Trading Range as Traders Prepare for US Consumer Inflation Data

By:
James Hyerczyk
Updated: Aug 8, 2022, 03:13 UTC

Traders are awaiting the release of Japan’s Economy Watchers Sentiment report. It is expected to come in at 51.6, lower than previously reported.

USD/JPY

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The Dollar/Yen is inching higher early Monday despite slightly lower U.S. Treasury yields. The market is showing little follow-through following the previous session’s surge that was fueled by a sharp rise in the 10-year U.S. Treasury yield on the back of a stronger-than-expected jobs report for July.

Nonetheless, traders aren’t reading much into the price action with expectations of a 75 basis point rate hike by the Fed at its September 21 meeting currently at 72.5%. Furthermore, most of the major players could be sitting on the sidelines ahead of Wednesday’s major U.S. Consumer Price Index report.

At 02:17 GMT, the USD/JPY is trading 135.322, up 0.279 or +0.21%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.27, down $1.14 or +1.62%.

Friday Recap

The USD/JPY soared on Friday, following a huge jump in Treasury yields after the U.S. government released a jobs report that blew away the forecasts on all levels.

The data showed the economy added 528,000 new jobs last month, surpassing Dow Jones’ expectations of 258,000. The Unemployment Rate surprising dropped from 3.6% to 3.5%, or below pre-pandemic levels. Most importantly, wage growth rose with Average Hourly Earnings climbing 0.5% for the month and 5.2% over last year.

The news helped widen the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment than the Japanese Yen.

Japan Bank Lending Picks Up to Meet Rising Material Costs

Japanese bank lending rose 1.8% in July from year earlier, accelerating from the previous month, as some companies borrowed more to meet rising raw material costs amid a surge in global commodity inflation.

The data is among factors closely watched by the Bank of Japan (BOJ) in deciding whether to end a pandemic-relief loan scheme, aimed at easing a credit crunch among small firms, as scheduled when it expires in September.

Japan’s Jan – June Current Account Surplus Shrinks to 3.51 Trillion Yen

Japan’s current account surplus shrank 63.1 percent in the first half of 2022 from a year earlier to 3.51 trillion yen ($25.9 billion), the Finance Ministry said Monday.

Among key components, the country had a goods trade deficit of 5.67 trillion yen and a service trade deficit of 2.50 trillion yen, according to the ministry’s preliminary report.

In June alone, the country logged a current account deficit of 132.4 billion yen, dipping into the red for the first time in five months.

Daily Forecast

Traders are awaiting the release of Japan’s Economy Watchers Sentiment report at 05:00 GMT. It is expected to come in at 51.6, down from the previously reported 52.9. Last month, Japan’s service sector sentiment index posted its first decline in four months in June, a sign of deteriorating sentiment regarding the overall economy.

There are no U.S. reports on Monday. Nonetheless, most of the major players are expected to remain on the sidelines until Wednesday’s U.S. Consumer Price Index (CPI) report and Core CPI data.

U.S. CPI is expected to have risen by 0.2%, which would be down from the previous month’s 1.3%. Core CPI is expected to have increased by 0.5%, which is only slightly lower than the previously reported 0.7% jump.

The figures suggest U.S. inflation may have peaked, especially with gasoline prices falling during July. However, this doesn’t mean the Fed is going to lighten up on its quest to drive consumer inflation down to its mandated 2.0%.

With 44 days to go before the Fed’s rate decision on September 21, traders are pricing in a 72.5% chance of a 75 basis point rate hike by policymakers. Since the Fed is expected to be aggressive with its next rate hike and the Bank of Japan (BOJ) is expected to maintain its ultra-dovish stance, the U.S. Dollar will continue to be the most favored currency.

The price action suggests traders are still reacting to Friday’s jobs report. In order to sustain the rally, Wednesday’s U.S. consumer inflation report is going to have to come in bullish or the USD/JPY could become rangebound.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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