USD/JPY Fundamental Weekly Forecast – Direction Hinges Upon Bond Trader Reaction to COVID Relief News

The Dollar/Yen settled sharply higher last week with the move primarily driven by another sharp rise in U.S. Treasury yields. Last week the rally was supported by comments from the U.S. Federal Reserve Chairman Jerome Powell and stronger-than-expected U.S. labor market data.

Yields also rose in Japan, but the U.S. yields rose more, widening the spread between U.S. Government bonds and Japanese Government bonds, while making the greenback a more favorable currency. Meanwhile, unlike Powell, Bank of Japan’s Governor Kuroda said that the BOJ has no need to change its yield guidance, meaning he will allow the Japanese Yen to bear the brunt of the dollar’s yield-fueled recovery if Treasury yields continue to rally.

Last week, the USD/JPY settled at 108.391, up 1.842 or +1.73%.

Last Week’s Recap

The USD/JPY rose to its highest level since June 8 last week after Fed Chair Powell triggered a rally on Thursday by expressing no concern about a recent sell-off in bonds. The Forex pair then spiked to a nine-month high on Friday following the release of a better-than-expected U.S. Non-Farm Payrolls report that indicated to investors that the economy was improving at a faster pace than previously expected.

The jobs report also backed up the view of Federal Reserve policymaker including Powell who said that a recent rise in U.S. government yields is justified by an improving economic outlook.

The first surge by the Forex pair came after Powell on Thursday disappointed investors who were expecting him to express concerns about rising bond yields. Powell stuck to his stance of keeping interest rates low until the economy has recovered, adding that the sell-off in Treasuries was not “disorderly”.

This Week’s Forecast

The key report this week is out of the United States. On Wednesday, the government will report its February consumer inflation figures. The Consumer Price Index (CPI) is expected to come in at 0.4%, up from 0.3% and the Core CPI is expected to show a rise of 0.2%, up from 0.0%.

A potential market moving event this week occurred over the weekend when the U.S. Senate passed a $1.9 trillion coronavirus relief package on Saturday as Democrats rushed to send out a fresh round of aid.

We expect to see a volatile response to this news, but ultimately the direction will be determined by the movement in Treasury yields. Higher yields will drive the USD/JPY higher, lower yields will put pressure on the Dollar/Yen by encouraging profit-taking after the steep rally.

Traders aren’t sure how to approach the news. The bulls believe more fiscal stimulus will heat up the economy, driving up interest rates and the U.S. Dollar. The bears are looking at another flood of dollars into the financial markets and higher U.S. debt levels.

In my opinion, we could see profit-taking and position-squaring this week as traders prepare for the release of the U.S. Federal Reserve’s monetary policy decisions on March 17.