USD/JPY Fundamental Daily Forecast – Weak Treasury Yields Weighing on Dollar/Yen Ahead of CPI Report

The Dollar/Yen is trading flat early Wednesday after hitting its lowest level since October 11 the previous session. The Forex pair posted its fourth straight loss ahead of U.S. inflation data that could guide the timing of a Federal Reserve interest rate increase.

Weaker U.S. Treasury yields have been weighing on the Dollar/Yen since November 3 when Federal Reserve Chairman Jerome Powell said officials can be patient on raising interest rates – after announcing a start to reducing their bond purchases – but won’t flinch from action if warranted by inflation.

At 05:37 GMT, the USD/JPY is trading 112.874, down 0.006 or -0.01%.

Treasury Yields Pull Back as Producer Inflation Report Comes in as Expected

U.S. Treasury yields fell after producer price inflation data came in as expected. The yield on the benchmark 10-year Treasury note dropped 5.8 basis points to 1.439%. The yield on the 30-year Treasury bond gave up 6.6 basis points, falling to 1.822%.

Wholesale prices rose 8.6% from a year ago in October, their highest annual pace in records going back 10 years, the Labor Department said Tuesday.

October’s producer price index, which is one measure of inflation that measures what companies get for the goods they produce, rose 0.6% from September, in line with Dow Jones estimates and an indicator that inflation pressures are continuing to pressure the U.S. economy.

Daily Forecast

Last month’s consumer price index, which is more closely monitored by investors as a more direct measure of inflation, will be released at 13:30 GMT on Wednesday. CPI is expected to show a 0.6% jump compared to the prior month.

Inflation readings, along with the recovery in the labor market, are being watched by the Federal Reserve as it starts to pare back emergency economic stimulus measures. The central bank announced last week that it would start this process by reducing its bond-buying program by the end of November.

Raising interest rates would be the next step in the Fed’s normalization of monetary policy.

Although the Fed is still a long ways away from considering raising interest rates, a stronger than expected CPI report could trigger a short-covering rally in the USD/JPY on Wednesday.

A weaker number or data that matches expectations could trigger a resumption of the sell-off especially if Treasury yields continue to weaken.