USD/JPY Fundamental Weekly Forecast – Continue to Monitor U.S. Treasury Yields for Direction

The Dollar/Yen closed higher for the week with the outlook for higher U.S. interest rates helping with most of the gains. There was a setback late in the week as investors reacted to dovish Fed commentary, falling oil prices and weak U.S. economic data. Falling Treasury yields also drove down the U.S. Dollar as investors priced in the possibility that weak inflation would curtail the Fed’s plan to raise rates later in the year.

The USD/JPY closed the week at 111.255, up 0.403 or +0.36%.

The Bank of Japan also released the minutes of its April meeting. Policymakers said that under the bank’s asset-purchase program, the amount of government debt purchases would fluctuate, but this did not pose a problem.

The minutes also noted that members were optimistic about exports and industrial production.

Forecast

The major reports this week are all in the United States. They include Core Durable Goods Orders, Conference Board Consumer Confidence, Final GDP and Weekly Unemployment Claims.

In addition to the reports, investors will listening intently to a speech by Fed Chair Janet Yellen and monitoring the price action in crude oil since it tends to influence these commodity-based currencies.

Yellen is scheduled to speak in London at the British Academy ‘President’s Lecture’ 2017 on global economic issues. There is also expected to be a question and answer session from the audience. We could see some volatile price action during the speech.

Haruhiko Kuroda, governor of the Bank of Japan, is scheduled to participate in a panel discussion at the European Central Bank Forum meeting on Central Banking in Portugal.

U.S. Core Durable Goods Orders are expected to come in at 0.4%, better than the previous month. Consumer Confidence is expected to come in lower than the previous read to 116.2. Final GDP is forecast at 1.2%, unchanged from the last report and weekly unemployment claims are expected to also come in unchanged at 240K.

Japanese Yen investors will be watching the interest rate differential between Japanese Government Bonds (JGB’s) and U.S. Treasury Bonds. This should have an influence on the direction of the USD/JPY.

U.S. Treasury yields have been falling lately because of weakening U.S. inflation and growth. Investors believe the economy is too weak to handle another Fed interest rate hike later in the year. Fed Chair Yellen may shed a little more light on this issue. Just two weeks ago, she was hawkish about Fed policy, but also expressed caution about inflation. She felt it would pick up by the end of the year, but in the wake of last week’s sell-off in crude oil, she may have changed her mind.

Barring any unusual events, we’re looking for the basic: U.S. yields down, Japanese Yen up and U.S. yields up, Japanese Yen down scenario.