USD/JPY Fundamental Weekly Forecast – Traders Eyeing US Consumer Inflation, Treasury Yields

The Dollar/Yen finished sharply lower last week with most of the loss occurring on Friday following a steep drop in U.S. Treasury yields in reaction to a disappointing U.S. employment report. The move helped tighten the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive asset.

Last week, the USD/JPY settled at 108.603, down 0.731 or -0.67%.

Despite the weak jobs data, many traders feel that the news doesn’t represent a trend and that the jobs market will bounce back in the near future as labor and material shortages are reduced. They conclude that Friday’s steep drop in U.S. Treasury yields was an overreaction and so was the plunge in the USD/JPY.

The Forex pair could bounce back this week if U.S. Consumer Inflation and Retail Sales come in better-than-expected, perhaps offsetting last week’s poor jobs market report.

This Week’s Outlook

There are a series of reports out of Japan this week, but none are major enough to move Japanese Government bond yields and the Japanese Yen.

The reports this week include Household Spending, Leading Indicators, Bank Lending, Current Account and Economy Watchers Sentiment.

Household spending is an important report, but not necessarily a market moving event. It is expected to rise by 1.7%, up from the previously reported -6.6%.

As far as the BOJ Summary of Opinions is concerned, look for central bankers to reiterate that Japan’s economy is picking up but any recovery is likely to be modest due to lingering caution over the coronavirus pandemic. Japan’s economy was likely to improve thanks to a rebound in global demand and the boost from the government’s massive fiscal spending.

Stateside, the key reports are Tuesday’s JOLTS Job Openings, a favorite of the Fed. The Consumer Price Index will be released on Wednesday and on Thursday, data on Retail Sales.

A jump in the consumer price index could make traders forget about Friday’s disappointing U.S. Non-Farm Payrolls report.

Traders will also get to hear the reactions to Friday’s jobs report from several Federal Open Market Committee (FOMC) members.

Any strong economic news from the United States is likely to underpin U.S. Treasury yields. This could make the U.S. Dollar a more attractive investment.