The Dollar/Yen posted a higher close last week with most of the strength driven by aggressive short-covering in reaction to a shift in sentiment toward Federal Reserve monetary policy and the widening of the interest differential between U.S. Government bond yields and Japanese Government bond yields. Both events made the U.S. Dollar a more attractive asset. A surge in demand for higher risk assets also diminished the Japanese Yen’s role as a safe-haven currency.

Last week, the USD/JPY settled at 108.474, up 0.545 or +0.50%.

Concerns over the size of the widely expected Federal Reserve interest rate cut in late July continues to drive most of the price action. The current rally began in June 25 when Federal Reserve Chairman Jerome Powell and St. Louis Federal Reserve President James Bullard cast doubts over the need for a 50 basis point rate cut. This fueled a four-day short-covering rally.

Following the counter-trend rally, the USD/JPY weakened for two sessions on worries over a global economic slowdown. This was triggered by the U.S. threat of new tariffs against the European Union.

On Friday, the Dollar/Yen surged and the main trend changed to up after a stronger-than-expected U.S. jobs report dampened the chances of a Fed rate cut. The benchmark 10-year U.S. Treasury yield rose above 2% as investors reduced the chances of a Fed rate cut on July 31 from 120% to about 100%.

It still seems like a certainty according to Treasury investors, but the main concern is how the Fed policymakers read the strength of the economy. Once again, it comes down to whether the Federal Open Market Committee (FOMC) needs more data to make a decision, or whether it feels that the time is right for the central bank to take “insurance” against a worsening economy.

Weekly Forecast

There are no major reports from Japan this week so the focus will be on the events in the U.S.

The theme this week will center on inflation data, remarks from Powell and the FOMC Meeting Minutes.

On Thursday, U.S. consumer inflation for June is expected to come in unchanged, but Core CPI is forecast to have risen 0.2%. On Friday, investors will be looking at Producer Inflation. It is expected to have risen 0.1%.

Weak inflation will support the argument for a Fed rate cut.

Even before the inflation data is released, investors will get a chance to react to speeches from Fed Chair Jerome Powell on Tuesday and Wednesday, and his testimony on Thursday. Investors looking for a rate cut will be listening to hear if Powell wavers from his “wait and see” and “data dependent” approach. In my opinion, Powell will stand his ground and use the strong jobs report to support his assessment that the economy may not need a rate cut at this time.

The FOMC Meeting Minutes on Wednesday may tell investors what policymakers need to see from the economy before a rate cut is a certainty.