USD/JPY Fundamental Weekly Forecast – Risk Sentiment Drives Price Action This Week

The Dollar/Yen fell sharply last week as Japanese investors bet strongly on the U.S. Federal Reserve making moves to keep a lid on Treasury yields. The Forex pair reached bottom for the week after the Fed made no such announcement and on safe-haven buying tied to a huge break in U.S. equity markets.

Last week, the USD/JPY settled at 107.353, down 2.241 or -2.04%.

Possible Fed Move to Cap Treasury Yields Could Further Weaken Dollar/Yen

The USD/JPY was under pressure at the start of the week as Japanese investors bet aggressively on the Federal Reserve adopting targets for U.S. Treasury yields that would limit their rise and ensure that interest rates remain near zero for some time.

Capping yields could diminish the attractiveness of U.S. Treasury debt, as investors look to other alternatives, analysts said. That may exacerbate a downtrend in the U.S. currency against the Japanese Yen that has been partly triggered by a gradual reopening of global economies following shutdowns aimed at curbing the spread of the novel coronavirus, Reuters said.

However, the Fed did not announce any measures to cap the rise of bond yields on June 10 at the end of its two-day meeting. But in a press briefing, Fed Chairman Jerome Powell said the central bank would consider curve controls once it gets a better understanding of where the economy is headed.

New York Fed President John Williams and Fed Governor Lael Brainard had raised the idea earlier as a possible complement to other monetary policy actions aimed at keeping rates and borrowing costs ultra-low to spur spending and buoy the economy.

Safe-Haven Demand Should Boost USD/JPY

We saw on June 11 that the U.S. Dollar is alive and well as investors moved money aggressively into the greenback after U.S. stocks plunged amid concerns over the economic recovery after the Fed issued a bleak outlook for the economy and while coronavirus related hospitalizations in certain states grew.

Weekly Forecast

The Dollar/Yen could continue to weaken if the stock market stabilizes and resumes its rally, but buyers will return if there is another steep drop in demand for risky assets.

Japanese Yen investors aren’t likely to bet as heavily on the Fed putting a cap on Treasury yields over the short-run. That question was asked and answered last Wednesday. However, the issue may re-emerge at some time in the future.

The main focus for investors this week should be on risk sentiment.