USD/JPY Fundamental Weekly Forecast – Treasury Yields Continue to Drive Price Action

Despite the weaker-than-expected U.S. consumer inflation data, the Dollar/Yen was able to hold on to its gains. It was primarily supported by the widening interest rate differential between U.S. Government Bonds and Japanese Government Bonds.

The USD/JPY settled at 109.352, up 0.317 or +0.29%.

In other news, Bank of Japan board members discussed the need for policy sustainability and strengthened commitment to reaching its 2 percent inflation goal during its April 26-27 policy meeting, when it removed language about when it expected to hit that target.

A summary of opinions from that meeting, indicate that the BOJ looks to continue on its current course.

In other news, bullish investors drove the Greenback to a multi-month high after 10-year Treasury yields took out the psychological 3 percent level for a second time in a month. However, the rally stopped and the dollar retreated against a basket of currencies after the U.S. government reported weaker-than-expected consumer inflation data.

The dollar began to weaken against the Japanese Yen after the Labor Department said on Thursday its Consumer Price Index rebounded less than expected in April.

U.S. consumer inflation rose 0.2 percent versus an estimate of 0.3%. Core CPI rose 0.1 percent, lower than the 0.2% estimate. The Dollar retreated because the report suggests the Fed will be less-aggressive with its plan to raise interest rates later this year. Currently, the market is pricing in 2 or 3 more rate hikes in 2018.

Forecast

This week, Dollar/Yen investors will continue to react to the movement in U.S. Treasury yields. If yields continue to retreat, the Japanese Yen will be supported. Another move over 3.00% by the 10-year U.S. Treasury yield is likely to spike the USD/JPY higher.

The U.S. Dollar is likely to respond to key U.S. reports on retail sales and Building Permits. Core Retail Sales are expected to rise 0.5%, up from the previously reported 0.2%. Retail Sales probably rose 0.4%, down from 0.6%. This report is important because it is a loose indicator of inflation.

Building Permits are expected to come in at 1.35 million units, matching the previous month’s report. This probably reflects rising mortgage rates.

There are also a slew of minor reports including the Empire State Manufacturing Index, Housing Starts, Capacity Utilization, Industrial Production, the Philly Fed Manufacturing Index and Weekly Unemployment Claims.

Several Fed speakers are also scheduled to throughout the week including FOMC Member Mester, Bostic, Williams and Brainard. Gold will react if they comment on inflation and the number of potential rate hikes.

Japan will release its quarterly Preliminary GDP early Wednesday.