USD/JPY Fundamental Weekly Forecast – Weakening on Concerns Over US Economic Slowdown

The biggest influence on the USD/JPY last week was mounting concerns that the trade war between the U.S. and China could persist longer and curb GDP growth more than first thought. The concern surfaced after the release of weaker-than-expected U.S. manufacturing and services PMI data.
James Hyerczyk
USD/JPY

The Dollar/Yen closed lower last week on concerns that the trade dispute between the United States and China has worsened enough to weaken the U.S. economy. There weren’t many new developments as far as the trade dispute is concerned. There was some jawboning between some officials, but for the most part, the price action was driven by lower Treasury yields, which tightened the spread between U.S. Government bond yields and Japanese Government bond yields.

Last week, the USD/JPY settled at 109.295, down 0.773 or -0.70%.

The Forex pair was supported early in the week ahead of the release of the minutes from the U.S. Federal Reserve monetary policy meeting on May 1-2. The Dollar/Yen found resistance at 110.677, which was slightly above the weekly 50% level at 110.585. Technical sellers came in at this point and with the Forex pair in a downtrend, new short-sellers may have emerged.

The Fed minutes offered nothing new for Dollar/Yen traders. They essentially reiterated the Fed’s “patient” stance. Officials expect patience on rates to be appropriate for “some time.”

Treasury traders are pricing in a rate cut by the end of the year, however. Long-term government debt yields fell to near multiyear lows last week. Two of the yields inverted, which means investors are looking for a rate cut, but some are reading this as a recession indicator.

The biggest influence on the USD/JPY last week was mounting concerns that the trade war between the U.S. and China could persist longer and curb GDP growth more than first thought. The concern surfaced after the release of weaker-than-expected U.S. manufacturing and services PMI data.

Weekly Forecast

This week is a holiday shortened week because of a U.S. banking holiday on Monday. There are no major reports from Japan. The major report from the U.S. is Preliminary GDP data. It is expected to come in at 3.1%, down from 3.2%.

A lower number could drive the USD/JPY lower because it will be a further indicating of a weakening U.S. economy. Treasury yields are likely to fall on the news as investors increase their bets on a Fed rate cut later in the year. The move would further tighten the spread between U.S. Government bond yields and Japan Government bond yields, making the U.S. Dollar a less-desirable investment.

Fed Fund futures are currently pricing in 50% chance of a cut in September and a full 25 basis-point cut by December. Traders are also looking for another rate cut for next year. As the trade war drags on the data-dependent Fed will have an easy choice in cutting rates. To some the question is not will they deliver a shift, but when.

This week’s price action and direction will continue to be controlled by the direction of U.S. Treasury yields. Yields will be influenced by demand for risk, but most of all the economic data.

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