USD/JPY Fundamental Daily Forecast – Traders Positioning for More Yellen, Friday’s CPI Data

The Dollar/Yen plunged on Wednesday after U.S. Federal Reserve Chair Janet Yellen came across as dovish during her testimony before the U.S. Senate Banking Committee. Yellen said the economy was strong enough to handle another rate hike before the end of the year and the start of the process of reducing its massive balance sheet, but muted inflation levels leaves the central bank with very little leeway when it comes to implementing monetary policy.

The USD/JPY settled at 113.163, down 0.776 or -0.68%.

Yellen is set to deliver more testimony on Thursday, however, the focus for traders has already shifted to today’s Producer Inflation report and Friday’s Consumer Inflation report. The PPI is expected to come in unchanged at 0.00% and the CPI is expected to show an increase of 0.2%, slightly lower than the previous 0.3%.

The dollar should recover from its current weakness if the inflation data come in at or higher than expected. The USD/JPY is facing the possibility of a steep loss if the data is weaker-than-forecast.

In other news, the Fed Beige Book said the U.S. economy grew at a “slight to moderate” pace over the last several weeks across all regions of the country, with wage pressures reported for both low-and high-skilled jobs.

“Activity expanded across all 12 Federal Reserve Districts in June with the pace of growth ranging from slight to moderate,” according to the Fed.

“Employment…maintained a modest to moderate pace of expansion,” the report found. “Wages continued to grow at a modest to moderate pace in most Districts… Rising wage pressures were noted among both low- and high-skilled positions.”

Forecast

Dollar/Yen investors should continue to monitor the direction of the interest rate differential between U.S. and Japanese government bonds. This is what investors are really watching.

Earlier this week, U.S. Treasury yields started to tumble with the release of Donald Trump Jr.’s emails on his meeting with a Russian lawyer that suggested the Russian government supported his father’s campaign. The sell-off continued following the remarks by Yellen.

The tightening of the spread between U.S. debt yields and Japanese debt yields will be bearish for the USD/JPY. A widening spread will be bullish.

I expect to continue to see more pressure on the USD/JPY on Thursday. The selling is likely to continue unless Yellen changes her tone to hawkish on Thursday. We could also see profit-taking and position-squaring ahead of Friday’s CPI data, but I don’t think investors are going to commit to the long side going into this important report.