USD/JPY Fundamental Weekly Forecast – Treasury Yields Will Determine This Week’s Direction
The Dollar/Yen started the week underpinned by expectations of higher interest rates ahead of the latest Fed monetary policy statement, but the price action the rest of the week suggests investors were largely disappointed by the news.
For the week, the USD/JPY surged into its highest level since February 5 at 110.028, but by the end of the week, it had retreated enough to finish lower for the week at 109.060, down 0.127 or -0.12%.
On May 2, the Federal Open Market Committee held the funds rate at a target of 1.5 percent to 1.75 percent, as expected. The committee noted that “overall inflation and inflation for items other than food and energy have moved close to 2 percent.” The Fed also noted some improvements in the economy, saying, “business fixed investment continued to grow strongly.”
The committee approved the decision to hold rates steady unanimously, though it has publicly disagreed about how aggressive the path forward should be. Multiple officials are scheduled to speak publicly in the coming days.
The Fed offered no hints as to the pace of future hikes which many investors have placed at two. The next rate hike is widely expected in June. The second could come in either September or December.
Helping to hold the number of rate hikes at two was Friday’s disappointing U.S. Non-Farm Payrolls report. The headline number came in below expectations, the unemployment rate hit an 18-year low, and Average Hourly Earnings offered little evidence that inflation is out of control.
Forecast
Selling pressure could continue to control the USD/JPY this week with investors continuing to book profits after last Wednesday’s Fed announcement and Friday’s U.S. jobs report.
The Federal Reserve’s message was relatively dovish, more or less signaling they’re willing to allow inflation to run hot and above its 2 percent target. Additionally, wage growth in Friday’s employment report fell short of expectations.
Traders should be watching the movement in the 10-year U.S. Treasury note futures contract since this market has been supporting the rise in the USD/JPY. The Fed statement and the jobs report are bullish for the T-note futures contract. Since it moves inverse to interest rates, a rise in the T-note will mean a drop in yields. Weaker Treasury yields should help pressure the USD/JPY.
Furthermore, traders have amassed a record net short position in the 10-year futures, with over 1 million shorts, according to the Commodity Futures Trading Commission. The USD/JPY could drop sharply if these shorts start to cover.
As far as reports are concerned, inflation will be at the forefront once again with the U.S. scheduled to report on Producer and Consumer Prices on Wednesday and Thursday respectively.
Several Fed speakers are also on tap including Fed Chair Jerome Powell on Wednesday at 1915 GMT.
This article was originally posted on FX Empire