USD/JPY Fundamental Daily Forecast – Yields, Risk Appetite Controlling the Action Ahead of Jobless Claims

The Dollar/Yen is trading nearly flat early Thursday following a two-day rally that recaptured about half of its recent decline from 111.659 to 109.065. Despite the impressive move, traders are still concerned about inflation and the surge in coronavirus cases, and their potential impact.

With the Forex pair hovering just below a key retracement zone at 110.362 to 110.668, traders may become content with just holding the Dollar Yen there ahead of the start of the U.S. Federal Reserve’s two-day policy meeting next Tuesday.

At 08:07 GMT, the USD/JPY is trading 110.335, up 0.047 or +0.04%.

From July 2 to July 19, worries about inflation, the Fed’s next move and plunging Treasury yields controlled the price action, driving the USD/JPY into its lowest level since May 27. Since Monday, however, the price action has been driven by risk appetite. This has also been the source of volatility.

Basically, when risk is “on”, investors jump into higher-yielding assets like stocks and sell lower yielding assets like the Japanese Yen. When risk is “off”, the Japanese Yen becomes a more attractive asset.

With heightened volatility this week, however, investors have been using the U.S. Dollar and Japanese Yen as safe-haven protection. Most traders have preferred the Yen over the Dollar when conditions get extremely risky.

With the volatility subsiding and risk back on, the dollar has started to become the more attractive asset again. A rebound in Treasury yields has also helped widen the spread between U.S. Treasury bonds and Japanese Government bonds. This is also providing support for the U.S. Dollar.

Daily Forecast

On Thursday, higher Treasury yields and demand for risk will be supportive for the USD/JPY, while lower Treasury yields and appetite for risk will cap gains and perhaps generate some additional selling pressure.

Technically, the direction of the USD/JPY on Thursday will be determined by trader reaction to 110.362.

A sustained move over 110.362 will indicate the buying is getting stronger with 110.668 – 110.698 the next likely upside target. Overtaking this area could trigger an acceleration to the upside. On the flipside, the inability to overcome 110.362 will signal the return of sellers.

In other news, the U.S. Department of Labor is due to release the number of jobless claims filed last week at 12:30 GMT on Thursday. Economists polled by Dow Jones are expecting the number of first-time filings to be 350,000 for the week ended July 17, down from the prior reading of 360,000.

Existing home sales data for the U.S. in June is due to come out at 14:00 GMT.