USD/JPY Fundamental Weekly Forecast – Will Strengthen if Interest Rate Differential Continues to Widen

The Dollar/Yen rose to its highest level since February 21 last week as investors responded to an easing of tensions over geopolitical events and rapidly rising U.S. Treasury yields.

The USD/JPY settled at 107.623, up 0.290 or +0.27%.

A widening of the spread between U.S. Government Bonds and Japanese Government Bonds (JGBs) made the U.S. Dollar a more attractive investment. Late in the week, investors seemed to overcome the so-called “Trump Risk”, which is the broad uncertainty stemming from U.S. President Trump’s trade and economic policies, as well as geopolitical posturing in the Middle East and elsewhere.

In other news, the Japanese Yen showed little response to the U.S. – Japan summit, at which Trump and Japanese Prime Minister Shinzo Abe agreed to intensify trade consultations between the two longtime allies.

Forecast

The direction of the Dollar/Yen this week is likely to continue to be influenced by rising U.S. Treasury yields and expectations of more rate increases from the U.S. Federal Reserve later in the year. Increased demand for higher risk assets should also help underpin the USD/JPY as well as the easing of tensions over geopolitical events.

Helping to boost yields last week was a comment from San Francisco Fed President John Williams who said last Tuesday that he expected U.S. inflation to rise to the U.S. central bank’s 2 percent goal this year and stay at or above that goal for “another couple of years.”

To keep the economy from overheating, he said, the Fed needs to keep raising interest rates. The Fed currently expects to raise rates three times this year, according to the central bank’s latest projections.

Further evidence of steady U.S. growth is likely to be supportive for the Dollar/Yen. In the U.S., economic data to be reported includes existing home sales on Monday, new home sales on Tuesday, and first quarter GDP on Friday. Traders will also get a chance to react to a report on consumer confidence as well as durable goods.

The big event in Japan this week is the Bank of Japan’s monetary policy decision. Traders expect the central bank to leave its benchmark interest rate at -0.10%.

Additionally, the BOJ will release its Monetary Policy Statement and Outlook reports. It will also hold a press conference.

I don’t think the BOJ will announce anything that will shock the markets so the biggest influence on the USD/JPY this week is likely to remain the widening differential between U.S. Government Bonds and Japanese Government Bonds.