USD/JPY Fundamental Daily Forecast – Rises as Investors Price in Future Rate Hikes

The Dollar/Yen continued to post a two-sided trade for a fourth day on Friday as investors digested fresh economic data, rising global interest rates and stock market weakness.

The USD/JPY recovered after a sharp break in the U.S. stock markets on Thursday drove investors into the safety of the Japanese Yen. The dollar was primarily supported as investors aggressively priced in future rate hikes after a number of central banks hinted that they were considering raising rates.

In Japan, core consumer prices rose 0.4 percent in May from a year ago, marking the fifth straight month of gains and offering the central bank some hope of strengthening economy will gradually lift inflation toward its ambitious 2 percent target.

Household spending fell 0.1 percent in May from a year earlier even as job availability was at its highest in 43 years, a sign that the tightening job market has yet to give a lasting boost to wages and consumption.

According to the Ministry of Internal Affairs and Communications, Japan’s jobless rate unexpectedly rose to 3.1 percent in May, while the availability of jobs rose for the third straight month to reach the highest since February 1974.

The Japanese government also said May’s increase in the unemployment rate was the first increase since November 2016. It blamed the rise on workers resigning to seek better jobs and new entrants joining the labor market.

Preliminary Industrial Production fell 3.3%, more than the -3.1% estimate. The last read was +4.0%. Japanese Housing Starts also dropped 0.3%, less than the expected 1.1%. Last month showed a rise of 1.9%.

U.S. economic data was generally upbeat. The Core PCE Price Index came in as expected, up 0.1%. Personal Spending also met expectations, up 0.1%, but below the previous 0.4%.

Personal Income came in at 0.4%, higher than the 0.3% forecast and previous read. Chicago PMI sounded beat the 58.1 forecast with a read of 65.7 and Revised University of Michigan Consumer Sentiment came in at 95.1, up from 94.5. It also beat the forecast.

The USD/JPY finished with a gain on Friday and for the week. U.S. economic data was strong enough to sustain the rally which began two weeks ago when the Fed raised rates and issued a hawkish monetary policy statement. It was further supported this week as several central banks hinted that interest rates were going higher. Gains were capped, however, as stocks weakened, driving up demand for the safe haven Japanese Yen.