USD/JPY Fundamental Daily Forecast – Sideways Trade Guided by Treasury Yields

The Dollar/Yen finished lower on Friday but the inside move suggested the tone was neutral. This reflected the mixed trade in the U.S. Treasury markets. Interest rates drove the price action all week. Early in the week, investors were buying in reaction to the Fed rate hike the previous week. Later in the week, investors were selling on worries over inflation and its impact on future rate hikes. The key to the direction of this Forex pair will be the interest rate differential.

The USD/JPY closed at 111.255, down 0.055 or -0.05%.

Some of the weakness was generated by the Japanese government’s upgraded assessment of the economy in its monthly report for the first time since December.

The Cabinet Office said in its June report that the economy is on a path of “moderate recovery.” That is the same language used previously, but the Cabinet Office upgraded its assessment by omitting a cautionary clause that had appeared in May. The cautionary clause had said some parts of the economy were suffering from “delayed improvement.”

In U.S. economic news, new home sales rose 2.9 percent in May, below the expected increase of 3.7 percent. The data showed new home sales came in at 610K units, higher than the 599K estimate and the upwardly revised 593K units from last month.

Flash Manufacturing PMI disappointed, coming in at 52.1, below the 53.1 forecast and 52.7 previous read. Flash Services PMI was also below expectations at 53.0. Traders were looking for 53.9.

In other news, St. Louis Fed President James Bullard said Friday there is still no need to further raise short-term rates right now. Bullard said the Federal Reserve can afford to stop raising short-term interest rates and wait and see how economic developments and policy debates play out in coming quarters.

Bullard said he saw no reason to raise interest rates as the economy appears to be firmly stuck in a “low growth, low inflation and low-interest-rate regime.”

“Many future developments could impact the Fed’s policy path, but the Fed does not need to pre-empt any of them,” Bullard said in a speech to a bankers’ convention in Nashville.

The direction of the USD/JPY over the near-term will probably be determined by the movement in U.S. Treasury yields. We could also see a volatile, two-sided trade because investor decisions will be dictated by U.S. economic reports and comments from Fed officials. Although the Fed meets again in July, it is not expected to make its next interest rate decision until September.