USD/JPY Fundamental Daily Forecast – Direction Under Control of U.S. Treasury Yields

The Dollar/Yen is trading lower early Tuesday. Volume and volatility are extremely low and you’re going to need a magnifying glass to read the charts because the price range is so small. This is typical end-of-the-summer trading but out of tight ranges comes great volatility.

There’s a chance it will return on Friday with the release of the U.S. consumer inflation report, but there is no guarantee. Investors aren’t expecting much from the report so it’s going to have to miss big in either direction to get a big reaction in the market. Normal volume and volatility may not return until after the U.S. Labor Day holiday on September 4.

At this time, the only thing USD/JPY traders should be watching are U.S. Treasury yields and the U.S. stock market. You don’t even have to pay attention to the reports because their results will be reflected in the direction of the yields.

If yields rise then this means the report is strong enough to support a Fed rate hike. If yields fall then this will indicate the report is weak, which means the Fed will likely pass on its third rate hike this year.

Today’s early weakness in the Dollar/Yen is a reaction to dovish comments from St. Louis Fed President James Bullard. He said the Federal Reserve can leave interest rates where they are for now because inflation is not likely to rise much even if the U.S. job market continues to improve.

“The current level of the policy rate is likely to remain appropriate over the near term,” Bullard told the America’s Cotton Marketing Cooperatives 2017 Conference in Nashville, Tennessee.

Bullard also said recent readings of low inflation are “concerning” because they may be temporary but indicative of persistent factors such as better technology that is driving down the price of many goods and services.

Forecasts

In addition to Bullard’s comments on Monday, Minneapolis Federal Reserve Bank President Neel Kashkari said reducing immigration to the United States will reduce economic growth. He did not comment on monetary policy.

Although the USD/JPY did dip a little after Bullard’s comments, it should be noted that the market already knew he was dovish. Besides, he isn’t even a voting member of the Federal Open Market Committee. Kashkari is also a dove and the lone-dissenter.

At the start of today’s session, the CME Group’s FedWatch data shows traders anticipate a 50.4% chance of a December rate increase.

Look for the USD/JPY to weaken today if Treasury yields continue to fall, but losses could be limited if stocks continue to rise because of increased demand for higher risk assets and the carry trade.