USD/JPY Fundamental Weekly Forecast – Bulls Need Strong US Inflation, Confidence Numbers to Sustain Rally

The Dollar/Yen settled higher last week after hitting its highest level since October 12 on Friday amid views that the United States has an advantage in growing its economy and vaccinating its population against COVID-19. Last week’s rally came as evidence pointing toward stronger recovery from the coronavirus pandemic for the United States than for other countries. Essentially, the move suggests the dollar may be more resilient in the near-term because both growth and vaccination favor the United States.

Last week, the USD/USD settled at 105.385, up 0.656 or +0.63%. This is down from a high of 105.786.

The previous paragraph explains why the Dollar/Yen was stronger last week, but there was a second development on Friday that stopped the rally, triggering a dramatic reversal to the downside:  The U.S. released disappointing jobs data. While not especially bearish news, it did cause enough worries to encourage investors to trim their long positions.

Speculators have been reducing short positions in the Dollar/Yen since the first week of January, but in order to continue the current uptrend, better U.S. economic data and continued progress in fighting the COVID-19 pandemic will be needed for further dollar gains.

“Soft non-farm payrolls has really pulled the ladder out from under the dollar,” said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities.

“Now the markets are questioning whether the dollar can rise any further. A lot depends on the coronavirus, but also need to know when U.S. fiscal stimulus will pass.”

The U.S. economy created fewer jobs than expected in January while job losses the previous month were deeper than initially reported, data at the end of last week showed.

Weekly Forecast

At the start of the week, traders will be looking for carryover from Friday’s weakness on the daily chart. If there is no major follow-through to the downside then this will indicate that investors still have confidence in the U.S. economy and that the jobs market will show improvement moving forward.

If there is a sharp break then we’ll have to determine whether this is the start of a new downtrend or just a normal correction of the month-long rally.

Helping to determine the tone in the USD/JPY could be this week’s U.S. consumer prices and consumer sentiment reports. They will have investors determine whether a recent rise in inflation expectations and Treasury yields was justified.

Any disappointing numbers from either report could knock the Dollar/Yen lower.

U.S. consumer inflation is expected to have risen 0.4%. Core CPI is expected to have jumped to 0.3% from 0.1%. Preliminary University of Michigan Consumer Sentiment is expected to come in at 80.8, up from 79.0.

Fed Chairman Jerome Powell is scheduled to deliver a speech on Wednesday at 19:00 GMT. Traders will be looking for clues as to the strength of the economy.

For a look at all of today’s economic events, check out our economic calendar.