USD/JPY Fundamental Daily Forecast – Weaker as Dismal US Sentiment Data Raises Questions Over Rate Hike Timing

The Dollar/Yen posted a dramatic technical closing price reversal top on Friday after an early session rally was squashed by a negative U.S. report on consumer sentiment.

The early strength was being fueled by increasing bets on a sooner-than-expected rate hike by the Federal Reserve after a report on Wednesday showed U.S. consumer inflation had heated up to a 31-year high.

The news also prompted investors to raise the chances of the Fed’s first post-pandemic rate hike to July 2022 with another to follow before the end of the year.

On Friday, the USD/JPY settled at 113.925, down 0.139 or -0.12%.

Friday’s rally came to a quick halt after a survey showed U.S. consumer sentiment plunged in early November to the lowest level in 10 years as surging inflation cut into households’ living standards, with few believing policymakers are taking sufficient steps to mitigate the issue.

The University of Michigan’s Consumer Sentiment Index plunged to 66.8 in its preliminary November reading from October’s final reading of 71.7. That was the lowest level since November 2011 and was far short of the median estimate among economists of 72.4 in a Reuters poll.

NY Fed’s Williams Says Fixed Income Households More Affected by High Inflation

Higher inflation does not affect all households equally, with people on fixed incomes taking a bigger hit, New York Federal Reserve Bank President John Williams said Friday.

“There are definitely segment … of our labor force and economy that are more protected against inflation and there others who are less so,” Williams said during a webinar organized by the New York Fed. “People on fixed incomes are obviously less protected against surprisingly high inflation.”

US Workers Quitting Reaches Record High, Job Openings Edge Down in September

The number of Americans voluntarily quitting their jobs rose to a record high in September while job openings stayed stubbornly above pre-pandemic levels, a sign that businesses may have to continue to raise wages in order to attract workers.

The Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS report, released on Friday, reflects an uneven economy with strong demand grinding against labor and goods shortages, driving overall inflation to its biggest annual gain in 31 years.

Wage inflation shows few signs of abating even as the daily case rate of coronavirus infections ebbs, with employers in almost every industry competing to lure workers and three million fewer people in the labor force compared to pre-pandemic levels.

Short-Term Outlook

Watch the economic data closely. Any talk of higher inflation will raise expectations of a rate hike. This will drive Treasury yields higher, making the U.S. Dollar a more attractive investment.

Weak economic data like we saw on Friday could relax the need for an early Fed rate hike. Treasury yields are likely to fall on this news, weakening the U.S. Dollar. This will push investors into the Japanese Yen.

Greater demand for protection from a steep stock market break will also drive investors into the Japanese Yen.