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USD/JPY Fundamental Daily Forecast – Rising Treasury Yields, Appetite for Risk Make U.S. Dollar More Attractive Investment

The primary market drivers of the rally in the USD/JPY will continue to be rising Treasury yields and increasing appetite for risky assets. The main catalyst will be optimism over U.S.-China trade negotiations.

Rising Treasury yields and increased appetite for risk continued to drive the Dollar/Yen higher on Wednesday. The catalyst behind the moves were increasing hope that U.S. and China high level negotiators would reach a trade deal before the March 1 deadline.

In other news, the latest U.S. government report on consumer inflation showed stagnant growth for a third straight month in January. Zero gain contributed to the smallest annual increase in inflation in more than 1.5 years, which could encourage the Federal Reserve to hold interest rates steady this year.

At 23:27 GMT, the USD/JPY is trading 110.996, down 0.009 or -0.01%.

Wednesday’s small consumer price index increase was not a surprise to traders. This was even forecast by the U.S. Federal Reserve in its January Monetary Policy Statement.

“In light of global economic and financial developments and muted inflation pressures, the Fed policy committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the Fed said.

Despite the low inflation and dovish outlook for future Fed interest rate hikes, the U.S. Dollar continues to be a more attractive asset than the Japanese Yen because of the favorable interest rate differential. Rising U.S. Treasury yields are widening the spread between U.S. Government bond yields and Japanese Government bond yields, drawing buyers into the U.S. Dollar.

The divergence in monetary policy is also making the dollar attractive. Although the Fed is looking for “muted” inflation and may take a pause this year in rate hikes, the Bank of Japan has no plans to reduce stimulate. Furthermore, it recently left monetary policy unchanged as it cut its inflation outlook once again, underscoring how far away its price target is and how few options the central bank has for drawing closer.

Daily Forecast

The primary market drivers of the rally in the USD/JPY will continue to be rising Treasury yields and increasing appetite for risky assets. The main catalyst will be optimism over U.S.-China trade negotiations.

At 23:50, investors will get the opportunity to react to Japan’s Preliminary GDP report. It is expected to have risen 0.4% versus a downwardly revised -0.6% last quarter. Additionally, the Preliminary GDP Price Index is expected to have declined by -0.4%.

In the U.S. on Thursday, look for a potential reaction to the Core Retail and Retail Sales reports. Core retail sales are expected to come in flat. Retail Sales are expected to post a modest gain of 0.1%.

U.S. producer inflation or PPI is expected to have risen 0.1% and Core PPI by 0.2%. Weekly Unemployment Claims are expected to come in at 225K, down from the previously reported 234K.

This article was originally posted on FX Empire

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