USD/JPY Fundamental Weekly Forecast – ‘Transitory Inflation’ Throws the Spotlight on US. Non-Farm PayrollsWith Powell focusing mainly on the labor market, we feel that this week’s U.S. Non-Farm Payrolls report will carry a lot of weight over the near-term.
The Dollar/Yen closed lower last week as dovish comments from the U.S. Federal Reserve and its Chairman Jerome Powell pushed Treasury yields and the U.S. Dollar lower, making the U.S. Dollar a less attractive asset. The dollar did pick up a little strength on the back of better-than-expected economic data later in the week as well as safe-haven buying tied to a sell-off in global equity markets on Friday.
Last week, the USD/JPY settled at 109.663, down 0.887 or -0.80%.
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With the Federal Reserve not scheduled to meet until September 21-22, Dollar/Yen traders will be left to interpret U.S. economic data for its potential impact on the Fed’s plans to begin tapering its bond stimulus purposes. Fed member comments will also have an impact on the price action as well as risk sentiment. These factors will likely have a volatile influence on the Forex pair with investors have nearly seven weeks to interpret whether the monetary stimulus can start being lifted.
Investors feel the Fed will eventually begin tapering. That’s a given. They just want to know when and how. Without that information becoming available for at least seven weeks, look for choppy, two-sided price action.
Last Week’s Recap
The direction of the USD/JPY last week was primarily driven by the Federal Open Market Committee’s decision to leave interest rates at historically low levels and to refrain from making a decision on tapering. Comments from Powell were behind most of the volatility and the sell-off.
Fed Chair Powell triggered a late session reversal last Wednesday and a follow-through rally on Thursday after he said the U.S. economy is still a good deal away from making “substantial further progress” toward the Fed’s dual mandates of stable prices and maximum employment.
“I’d say we have some ground to cover on the labor market side,” Powell said Wednesday. “I think we’re some way away from having had substantial further progress toward the maximum employment goal.”
With Powell focusing mainly on the labor market during last week’s press conference after the central bank’s policy statement was released on Wednesday, we feel that this week’s U.S. Non-Farm Payrolls report, due to be issued on Friday, will carry a lot of weight over the near-term.
The report is expected to show a Non-Farm Employment Change of 895K new jobs in July. The Unemployment Rate is expected to have fallen from 5.9% to 5.7% and Average Hourly Earnings are expected to come in unchanged at 0.3%.
Last Friday, the government report that the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.4% in June after advancing 0.5% in May. However, the pace of the increase was a little slower than previously reported.
Powell thinks inflation will eventually subside, but he doesn’t seem to have enough confidence in the labor market recovering at a fast pace especially if the COVID resurgence causes a bump in unemployment.
Any combination of tepid inflation and strong labor market gains will be supportive for the USD/JPY. A weak jobs report will drive investors out of the U.S. Dollar.