USD/JPY Fundamental Weekly Forecast – It’s All About U.S. Inflation This Week

A late shift in investor sentiment helped drive the Dollar/Yen slightly higher last week. The inability to take out the 50% level at 109.919 combined with a widening of the interest rate differential between U.S. Government Bonds and Japanese Government Bonds helped bolster prices.

The USD/JPY settled the week at 110.664 after trading as low as 109.837.

The Forex pair traded in a tight range all week. Supporting the USD/JPY was increased demand for higher risk assets. This encouraged carry-trade buying. The market was capped by weak U.S. inflation data, low consumer spending and concerns about the Fed’s monetary policy. Worries about political and geopolitical risks also helped pressure the U.S. Dollar.

U.S. Jobs Report

Friday’s stronger-than-expected U.S. Non-Farm Payrolls report helped shift investor sentiment to slightly bullish. Leading to a strong short-covering rally into Friday’s close.

According to government, the U.S. economy added 209,000 jobs in July, while the unemployment rate fell to 4.3 percent, the lowest since March 2001. The payrolls number exceeded the median forecast of 183,000, while the unemployment rate met expectations.

The most closely watched number of the report was the average hourly wages. It was unchanged from previous months with average hourly earnings up 2.5 percent on an annualized basis. The average work week also was unchanged at 34.5 hours. Stated another way, Average Hourly Earnings were up 0.3%, equally the forecast. This was up from the previous 0.2% read.

In addition to the strong July report, June’s 222,000 gain was revised up to 231,000 though May was cut from 152,000 to 145,000.

Higher Yields Boost Demand for U.S. Dollar

U.S. Treasury yields rose on the NFP news, with the benchmark 10-year yield climbing to trade at 2.264 percent, while the short-term two-year yield rose to 1.355 percent. The news was bullish enough to sway Federal Funds futures traders. According to the CME Group’s FedWatch tool, market expectations for a December rate hike are now approximately 50 percent, up from 47 percent. The spread between U.S. Government Bonds and Japanese Government Bonds widened on the news.

More Demand for Higher-Risk Stocks, Less Demand for Lower-Yielding Yen

Stock market investors liked the jobs report, rising shortly after its release and adding to those gains throughout the session. The blue chip Dow Jones Industrial Average rose to its 8^th straight record close. The financial sector led both the Dow and the benchmark S&P 500 higher. The tech-based NASDAQ Composite also posted a modest gain.

Forecast

There are no major reports from Japan this week. In the U.S., the major report is Friday’s Consumer Inflation report. July CPI is expected to rise 0.2%, up from 0.0% in June. Core CPI is expected to increase 0.2%, up from 0.1%.

Stronger-than-expected CPI data will be bullish for the USD/JPY because this will increase the chances of another Fed rate hike later in the year. Weaker CPI data or a major sell-off in U.S. equities will be bearish for the USD/JPY.

It’s safe to say that any U.S. reports that point toward higher inflation or a growing economy will be supportive for the Dollar/Yen. Signs of lower inflation or a weakening economy will pressure Treasury yields, making the Japanese Yen a more attractive investment.