USD/JPY Fundamental Weekly Forecast – Could Spike Higher if Fed Suggests V-Shaped Recovery

The Dollar/Yen soared last week as the Forex pair finally broke out of its three week trading range. The breakout to the upside was fueled by a surge in U.S. Treasury yields which made the U.S. Dollar a more attractive asset. At the same time, investors betting on a speedy recovery in the global economy drove down demand for safe-haven assets like the Japanese Yen, U.S. Treasurys and gold.

Last week, the USD/JPY settled at 109.594, up 1.801 or 1.67%.

Early in the week, the Japanese Yen fell to a seven-week low against the U.S. Dollar when it spiked to the downside on June 2. Traders said the catalyst behind the move was a surge in risk appetite which grew on optimism that the worst of the economic downturn from the spread of the coronavirus is in the past.

Risk appetite was driven higher as U.S. stocks gained as cheer over business reopenings overcome concerns about U.S.-China tensions and mass protests across the United States over the death of an African-American man in police custody.

Other factors that contributed to the rise in the USD/JPY was the release of an upbeat statement by the Reserve Bank of Australia (RBA) and the announcement of fresh stimulus measures by the European Central Bank (ECB).

The RBA held rates at all-time lows on Tuesday and sounded less gloomy as the economy gradually reopens during what is likely to be the worst quarter since the Great Depression of the 1930’s.

Meanwhile the ECB announced Thursday it will increase its Pandemic Emergency Purchase Programme by 600 Euros ($672 billion) as it attempts to bolster the economy following the coronavirus crisis.

Finally, the USD/JPY posted its highest close since the week-ending March 27 after the release of much better than expected Non-Farm Payrolls data and an unexpected drop in the U.S. unemployment rate.

The U.S. labor market news drove Treasury yields sharply higher. The yield on the benchmark 10-year Treasury Note popped 11 basis points to 0.926%, the highest level since March 24. The benchmark rate has risen about 30 basis points this week alone, on pace for its best weekly performance since late February.

Weekly Forecast

USD/JPY traders should be focused on the U.S. Federal Reserve this week because they will be calling the shots. Traders often say “Don’t Fade the Fed”. So they will be paying close attention to what the central bank policymakers have to say.

Since the last two day Federal Open Market Committee meeting on April 28 -29, the U.S. equity markets have soared with the benchmark S&P 500 Index gaining 8.66%.

The stock market is currently in a V-Shaped recovery, however, most economists predict the recovery in the economy is more likely to be U-Shaped. However, the huge pickup in payrolls in May has rekindled hopes that the economic slump may not be nearly as bad as it looked and could soon give way to an exodus of workers back to their jobs and a sharp broader recovery.

Dollar/Yen traders will be watching the Fed closely because they may have the final say as to what the recovery will look like and this could have an effect on Treasury yields and the U.S. Dollar.

If the Fed endorses a V-shaped recovery and endorses it with supporting comments about interest rates then we could see another spike to the upside by the USD/JPY.

If the Fed’s economic projections don’t support the rising demand for risk or if they see a much slower recovery then stock market investors may decide to trim their bets on equities and move some of their funds back into the safe-haven Japanese Yen.