USD/JPY Fundamental Weekly Forecast – Dollar Bulls Driven by Sharp Rise in US Treasury Yields, Strong Appetite for Risk

The Dollar/Yen posted a strong gain last week on the back of a sharp rise in U.S. Treasury yields. This widened the spread between U.S. Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive investment. After posting a mostly sideways trade for two weeks, the Dollar/Yen broke out to the upside to its highest level since December 20. The catalyst behind the rally was the stronger-than-expected U.S. Gross Domestic Product report, which helped drive up the chances of at least one rate hike by the Fed in 2019.

Last week, the USD/JPY settled at 111.933, up 1.264 or +1.14%.

On the economic front, U.S. Fourth-Quarter Gross Domestic Product (GDP) came in stronger than expected at 2.6%, and 2.9% for full-year 2018. Traders were looking for a 2.2% increase during the fourth quarter.

The details of the report showed growth was helped by a 2.8 percent rise in consumer spending along with increased nonresidential fixed investment, exports, private inventory investment, and federal spending.

According to the Commerce Department, weakness in residential fixed investment, which fell 3.5 percent, and state and local government spending served as a drag. The gross private domestic gain slowed to 4.6 percent in the quarter after a robust 15.2 percent rise in the previous period.

In other news, the Institute for Supply Management released data showing U.S. Manufacturing activity expanded at its slowest pace since November 2016. ISM Manufacturing PMI was 54.2, missing the 55.6 forecast and coming in below the 56.6 previous reading. The University of Michigan consumer sentiment index came in below expectations for February at 93.8 versus a 95.8 forecast. The Core PCE Price Index was flat at 0.2%, but Personal Spending and Personal Income fell.

Weekly Forecast

The direction of the USD/JPY this week is likely to be primarily influenced by U.S. Treasury yields and appetite for risk. Rising yields and equity prices should continue to make the safe-haven Japanese Yen a less-desirable asset.

Optimism over a trade deal between the United States and China is the wildcard this week. According to a report from Bloomberg on Friday, the two economic powerhouses are close to completing a deal which will essentially end the year-long trade dispute. However, investors could turn cautious if the agreement lacks clarity or important details.

On Friday, all eyes will be on the U.S. Non-Farm Payrolls report. Last week, Fed Chairman Powell said the labor market is strong. This report is expected to show the economy added 185K jobs in February. The Unemployment Rate is expected to dip to 3.9% and Average Hourly Earnings are estimated to have risen by 0.3%, up from 0.1%.