USD/JPY Fundamental Daily Forecast – Underpinned by ‘Risk On’ Tone Ahead of Tech Earnings Reports, Fed News

The Dollar/Yen on Friday closed at its highest level since July 13 after a volatile session at the start of the week was fueled by a drop in investor sentiment. Since Monday’s steep sell-off, prices have risen on shifting risk sentiment ahead of next Wednesday’s Federal Reserve meeting.

Some of the rally was bolstered by strong Wall Street earnings that helped investors regain some confidence in the midst of worries that the Delta coronavirus variant could derail the global recovery.

On Friday, the USD/JPY settled at 110.550, up 0.371 or +0.34%.

Risk appetite remained high on Friday, with the rise in U.S. stocks, the sell-off in Treasuries, gains in most commodity currencies, and the greenback coming off its peaks.

Higher Treasury Yields Making Dollar More Attractive than Lower-Yielding Japanese Yen

Treasury yields climbed on Friday to finish the week higher, rebounding from the previous session. The yield on the benchmark 10-year Treasury note added 3 basis points, climbing to 1.288%. The yield on the 30-year Treasury bond gained 2 basis points, rising to 1.927%.

Treasury yields rebounded having fallen in Thursday’s session, after jobless claims data came in higher than expected. The number of first-time unemployment insurance claims filed last week came in at 419,000, versus the 350,000 filings expected by economists.

On the Riskier Side of Investing, US Stock Indexes Climb with Dow Crossing 35,000 for First Time Ever

U.S. equities rose Friday with the major averages hitting new records as they overcame concerns about economic growth from earlier in the week.

Strong earnings from tech stocks made investors optimistic ahead of reports this week from the biggest names in the sector.

Strong Earnings Helping Investors Downplay the New COVID Outbreak

The stock market overall has been bolstered by a strong earnings reporting season, with nearly a quarter of the S&P 500 having already reported. Of those companies, 88% have reported a positive surprise, according to FactSet. That would mark the highest percentage of reported surprises within the S&P 500 since 2008 if that figure holds throughout the earnings season.

Profit growth for the second quarter is expected to come in at 76%, according to Refinitiv, which would be the best growth since 2009. Profit margins have also held up in the face of rising inflation, with companies reporting average profit margins of 12.8%, so far for the second quarter, above the historical range, according to S&P Global.

Short-Term Outlook

The Dollar/Yen trade has always been about risk. When risk is on, the Forex pair strengthens, when it’s off, it weakens. That’s the theme to watch for over the short-run. We see no reason to change the course unless the Fed reveals a major surprise on Wednesday.

The market focus now turns to next week’s U.S. Federal Reserve meeting after the European Central Bank on Thursday pledged to keep interest rates at record lows for some time.

While no Federal Reserve policy changes are expected in July’s meeting, we could hear more about the tapering discussions that started in June, ING Analysts wrote. The volume surrounding this issue is likely to be turned up at the August Jackson Hole conference with the risks remaining skewed towards earlier policy normalization that that the Fed is currently signaling.