USD/JPY Fundamental Daily Forecast – Upside Momentum Could Slow Ahead of Yellen Testimony

The Dollar/Yen closed higher on Monday, but the rally stalled at 114.294, slightly below the May 10 top at 114.367. The move corresponded with the rise in sovereign bond yields which also paused as investors began preparing for remarks from Federal Reserve Chair Janet Yellen later in the week. Yellen is scheduled to testify before Congress on monetary policy on Wednesday and Thursday. Her comments may offer fresh clues on policy direction.

The USD/JPY finished the session at 114.030, up 0.133 or +0.12%.

Besides rising U.S. Treasury yields and increasing expectations for another Fed rate hike later in the year, the Dollar also rose against the Yen to nearly a two-month high on Monday as the Bank of Japan’s offer last week to buy an unlimited amount of bonds drew investor’s focus to the divergence between the monetary policies of the Fed and the Bank of Japan.

On Monday, BOJ Governor Haruhiko Kuroda reiterated the central bank’s pledge to keep Japanese government bond yields anchored near zero.

To recap yesterday’s reports, Japanese Bank Lending came in slightly better at 3.3%, but Core Machinery Orders fell unexpectedly by 3.5% and the Current Account shrunk from 1.81 trillion to 1.40 trillion.

The U.S. Labor Market Conditions Index came in at 1.5, less than the previously revised 3.3. Consumer Credit was 18.4 billion, well above the previous 12.9 billion. These reports had limited impact on the USD/JPY with most investors focused on interest rates.

Forecast

The primary focus on Tuesday will remain on the differential between U.S. Treasury yields and Japanese Government Bond (JGB) yields. Currently, the spread between 10-year U.S. Treasury yields and their Japanese counterpart is close to the widest in nearly two months. This move is attracting a lot of interest from speculators willing to play the divergence between central bank policies.

The long-term outlook for the USD/JPY will remain bullish if the interest rate differential continues to widen. However, there will continue to be a few stops and starts especially if investors are unwilling to chase the Forex pair higher and instead start looking for value.

Later today, investors will get the opportunity to react to the latest Japanese Preliminary Machine Tool Orders. Last month it came in at 24.5%.

Traders will get a chance to react to minor reports including the NFIB Small Business Index. It is expected to come in at 104.4, slightly below the previous month. The JOLTS Job Openings report is expected to show 5.98 million. This is also slightly below the previous 6.04 million. U.S. Final Wholesale Inventories are expected to come in unchanged at 0.3%.

FOMC Member Lael Brainard is also scheduled to speak at 1630 GMT. She is a noted dove so she may try to talk down the possibility of a Fed rate hike later in the year.

Brainard’s remarks could move the market, but most investors are likely to remain focused on the spread between U.S. government debt and Japanese government debt as well as Yellen’s testimony on Wednesday. This could give investors an excuse to book some profits today or square a few positions.

While I don’t recommend shorting the USD/JPY at current levels, I do think that upside momentum will begin to slow after its recent rally as prices become overbought and investors become nervous over buying strength ahead of Yellen’s comments.