USD/JPY Fundamental Weekly Forecast – Traders Will Be Looking for Guidance from Fed Minutes, Chairman Powell

The Dollar/Yen surged to a multi-month high last week as expectations of a strong recovery in the U.S. economy helped widen the spread between U.S Government bond yields and Japanese Government bond yields, making the U.S. Dollar a more attractive asset.

Last week, the USD/JPY settled at 110.644, up 0.964 or +0.88%.

Japanese Economic News

The week started with the release of the Bank of Japan (BOJ) Summary of Opinions. The report showed some BOJ policymakers saw early bright spots in the pandemic-hit economy even as they debated steps to make the bank’s ultra-loose monetary policy more sustainable, a summary of opinions voiced at the March rate review released on March 29.

At the March meeting, the BOJ decided on a range of steps to make its policy tools sustainable enough to weather a prolonged battle to cushion the economic blow from COVID-19, and fire up inflation to its perennially elusive 2% target.

“Japan’s economy may be shifting away from a downward trend since the outbreak of COVID-19, with exports and output remaining firm,” one of the nine board members was quoted anonymously as saying in the summary.

“Although uncertainties remain over COVID-19…downside risks to economic activity at home and abroad have been contained with no signs of increase in industries suffering from deteriorating business conditions,” another board member said.

On prices, some board members warned that risks of deflation or prolonged price stagnation remained the BOJ’s primary concern, even as some Western economies were experiencing an uptick in inflation, the summary showed.

The remarks reinforce a dominant market view that the BOJ will keep monetary policy steady for the time being in hope a rebound in overseas demand will underpin Japan’s export-reliant economy.

One BOJ board member voiced hope that the review of its tools would allow the central bank to stick to its current policy framework ‘for a few years to come”.

In a sign the BOJ’s policy review had gained consent from the government, a finance ministry representative attending the March meeting said he had “no disagreement” over the decision, according to the summary.

Weekly Forecast

The direction of the USD/JPY this week will be determined by how Treasury investors react to last Friday’s blowout U.S. Non-Farm Payrolls report. The news was bullish for the economy, which on paper, means Treasury yields should rise, driving up the U.S. Dollar. However, there are some concerns about a fourth wave of coronavirus cases in the U.S., which could put a near-term lid on yields.

On the data front, the major U.S. report is Wednesday’s FOMC Meeting Minutes. The minutes may offer insight as to what it will take for Fed policymakers to begin tightening sooner than expected. Meanwhile, Fed Chair Jerome Powell speaks on Thursday. Traders are hoping he clarifies the Fed’s position on inflation, rising yields and whether the Fed has an early exit strategy.