USD/JPY Fundamental Weekly Forecast – Direction Hinges on U.S. Consumer Inflation Data

The Dollar/Yen closed higher last week with the Forex pair closing higher four out of five sessions. The move started on April 1, driven by a drop in Japanese government bonds. The rally was supported as risk aversion in the broader financial markets eased, dimming the appeal of Japanese safe-haven debt. The catalyst behind the move was encouraging manufacturing activity data from the United States and China.

Last week, the USD/JPY settled at 111.718, up 0.874 or +0.79%.

The risk aversion theme continued all week with U.S. Treasury yields firming and U.S. stock indexes coming within striking distance of their all-time highs. Furthermore, helping to put Japanese Yen investors on the defensive was the biggest one-day sell-off in three months by the U.S. Treasurys.

After the release of stronger-than-expected Chinese and U.S. manufacturing PMI data, U.S. economic data was mixed throughout the week, but demand for the Dollar/Yen remained strong because of rising hopes of a U.S.-China trade deal.

In the U.S. last week, Retail Sales, Durable Goods and ISM Non-Manufacturing PMI underperformed. However, this news may have been offset by better-than-expected data on ISM Manufacturing PMI, Construction Spending and Weekly Unemployment Claims.

On Friday, the USD/JPY finished the week on a high note, despite a mixed performance in the Non-Farm Payrolls report. The headline number beat expectations, the unemployment rate came in as expected, but average hourly wages underperformed.

In Japan, there were no major reports but the Tankan Manufacturing Index and the Tankan Non-Manufacturing came in below expectations, suggesting a lack of confidence in the economy. Final Manufacturing PMI continued to come in below 50, which indicated a contraction. Additionally, Household Spending came in at 1.7%, below the forecast.

Weekly Forecast

Dollar/Yen traders will continue to monitor the direction of U.S. Treasury yields and appetite for risky assets. If both continue to rise then the Forex pair should move higher although buyers could run into resistance at 111.940 and 112.137.

The price action is likely to continue to be influenced by U.S.-China trade relations and U.S. economic news.

There are no major reports from Japan this week, but investors will get the opportunity to react to major economic reports from the U.S. including the Consumer Price Index, the Producer Price Index and the Federal Open Market Committee policy meeting minutes. A slew of FOMC Members are also scheduled to speak.

Traders will be paying particular attention to the CPI data especially because of the dip in U.S. Average Hourly Wages. The economy may be holding steady, but the Fed isn’t likely to switch gears to hawkish again if inflation continues to decline.