USD/JPY Fundamental Daily Forecast – Weak US Consumer Sentiment Could Drive Dollar/Yen Sharply Lower

The Dollar/Yen is trading slightly lower early Friday after posting a steep sell-off the previous session. After a bullish start to the week, the Forex pair is in a position to finish lower for the week.

The selling pressure is being fueled by rising U.S. Treasury bonds, which are tightening the spread between U.S. Government bond yields and Japanese Government bond yields.

The catalyst behind the volatile price action is fear of a global recession that is dampening expectations for interest rate hikes from the major central banks.

At 06:46 GMT, the USD/JPY is trading 134.743, down 0.222 or -0.16%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.37, up $0.63 or +0.92%.

Thursday’s US Session Recap

The USD/JPY took a hit on Thursday as U.S. Treasury bonds extended this week’s strong upward advance. The move in the benchmark U.S. Treasury note drove yields 8.8 basis points lower to 3.068, making the U.S. Dollar a less-attractive investment.

Treasurys continued to benefit from safe-haven buying as investors priced in concerns over a potential recession. This led to the 10-year yield finishing lower for the fifth time in six trading sessions, and at its lowest closing level in two weeks.

Dollar/Yen traders were also watching Fed Chair Powell’s testimony before the House Financial Services Committee, with the Fed Chief reiterating that the U.S. central bank is “strongly committed” to cooling the soaring inflation rate.

Powell also said aggressive interest rate hikes by the Fed to tame inflation could cause unemployment to rise.

In economic news, the Labor Department said U.S. weekly jobless claims fell 2,000 to a seasonally adjusted 229,000 for the week-ended June 18, though the labor market remains tight. In other news, manufacturing and service PMIs came in well below expectations.

Japan’s Core CPI Tops Central Bank Target

Japan’s annual core consumer inflation topped the central bank’s target for a second straight month in May, data showed on Friday, highlighting the intensifying pressure on the country’s fragile economy from soaring global raw material costs.

The data challenges the Bank of Japan’s view that the recent rise in prices is temporary, and does not warrant withdrawing monetary stimulus.

But with growth subdued, many analysts expect the BOJ to remain firmly focused on stimulating a sluggish economy rather than fight inflation with interest rate hikes, Reuters reported.

Short-Term Forecast

Bearish traders will be watching for further negative economic readings in the United States to support their case for a U.S. recession.

On Friday, the report drawing the most attention will be University of Michigan Consumer Sentiment. Traders are especting a reading of 50.2. Anything under 50.0 could spike the USD/JPY lower.

Also impacting the trade on Friday will be a report on new home sales. The forecast calls for a dip to 590K, down slightly from 591K.