USD/JPY Fundamental Daily Forecast – Widening Interest Rate Differential Supporting U.S. Dollar

The Dollar/Yen is trading higher on Wednesday, boosted once again by rising U.S. Treasury yields and increasing demand for higher-yielding assets. Both factors are making the U.S. Dollar a more attractive asset.

At the same time, the Japanese Yen is being pressured by the easing of demand for safe-haven protection. The catalysts behind all of the price action are improved prospects for a U.S.-China trade deal and the news that U.S. lawmakers had secured a tentative deal on border security funding, thus averting a government shutdown.

At 05:03 GMT, the USD/JPY is trading 110.584, up 0.098 or +0.09%.

U.S. government debt yields rose on Tuesday after federal lawmakers reached a deal to fund the government and avoid a repeat shutdown. The helped widen the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment.

The major U.S. equity markets also posted solid gains with the benchmark S&P 500 Index crossing to the strong side of its 200-day moving average for the first time since December. The strength in the stock market drove the Dollar/Yen higher because of the carry trade. Investors borrowed money in cheap Japanese then bought U.S. Dollars to investment in U.S. stocks. This also drove up the dollar while pressuring the Japanese Yen.

In U.S. economic news, the JOLTS Job Openings report came in better-than-expected at 7.34M. This beat the 6.84M forecast. The previous month was also revised higher to 7.17M.

Fed Chair Powell spoke on Tuesday but did not address monetary policy. FOMC Member Esther George said she supports taking a pause in future rate hikes.

In Japan, the Producer Price Index came in at 0.6%, below the 1.0% forecast. The previous report showed a 1.5% increase. The weak number indicates that Bank of Japan policy to stimulate the economy is not working.

Daily Forecast

The price action in the USD/JPY will continue to be supported by rising Treasury yields and firmer equity prices.

Traders will also get the chance to react to several reports including CPI, Core CPI and the Federal Budget Balance.

The CPI is expected to have increased by 0.1%. The Core CPI is expected to have risen by 0.2%. The two reports are expected to reaffirm the comments from the Fed which said that inflation was muted.

The Federal Budget Balance is expected to come in at -10.5 billion. This is better than the -204.9 billion reported last month.

Early Thursday, Japan will release data on Preliminary GDP.

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