USD/JPY Fundamental Weekly Forecast – Traders Focusing on Direction of US Treasury Yields

The Dollar/Yen settled higher last week with most of the gains coming in on Monday, May 11. After that spike to the upside, the Forex pair drifted mostly sideways to lower. The price action was surprisingly subdued despite rising tensions between the United States and China, a dire warning from a key healthcare officials about opening the U.S. economy too soon and a stern warning from a high-ranking central bank official about the future of the economy.

Last week, the USD/JPY settled at 107.170, up 0.478 or +0.45%.

Analysts Worried about Rising U.S.-China Tensions

Analysts have become increasingly worried about rising U.S.-China tensions. U.S. President Donald Trump blames China for its handling of the COVID-19 disease that has killed more than 85,000 American, according to Reuters.

Trump signaled a further deterioration of his relationship with China by saying he has no interest in speaking to President Xi Jinping right now.

The President went on to suggest he could even cut ties with the world’s second-largest economy, a day after the U.S. federal pension fund delayed investment in Chinese shares in the wake of pressure from the White House.

The move fanned fears the confrontation between Washington and Beijing could escalate beyond trade to finance and other areas.

On Friday, the Trump administration moved to block global chip supplies to blacklisted telecoms equipment company Huawei Technologies, spurring fears of Chinese retaliation and hammering shares of U.S. producers of chipmaking equipment.

COVID-19 and U.S. Economic Concerns

On Tuesday, White House task force coronavirus expert, Dr. Anthony Fauci warned that relaxing stay-at-home rules too quickly could bring more ‘suffering and death”. On Wednesday, U.S. Federal Reserve Chairman Jerome Powell warned of an “extended period” of weak economic growth.

Additional concern were raised after the latest U.S. retail sales report showed a second straight month of record declines in April.

Weekly Forecast

It’s hard to tell which way the USD/JPY will move this week with investors using both the U.S. Dollar and Japanese Yen for safe-haven protection. Since the Forex pair spiked higher on May 11 due to a surge in U.S. Treasury yields, we’re going to say that yields are going to be the main driver of the price action this week. (I know, pretty obvious). Meanwhile, if there is going to be a source of volatility, it’s going to be U.S. Treasury traders pricing in the possibility of negative interest rates in early 2021.

Traders should also watch for a reaction to the COVID-19 numbers as more countries loosen restrictions, and the three speeches by Fed Chair Powell. He seldom changes his mind so I don’t expect him to waver much from last week’s forecast.