USD/JPY Fundamental Daily Forecast – Tracking Yields Closely as Traders Prepare for Friday’s NFP Report

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The Dollar/Yen is trading flat early Tuesday after posting a mixed-to-lower performance the previous session as U.S. Treasury yields weakened amid a round of position-squaring ahead of Friday’s important U.S. Non-Farm Payrolls report.

Despite the sell-off at the start of the new month, bullish traders remain optimistic that the Forex pair will push higher into the end of the year on the back of the start of Fed tapering in November and expectations of the first Fed rate hike in late 2022. Meanwhile, the outlook for the Japanese economy remains dismal with it showing no signs of moving toward the country’s 2% inflation mandate.

Essentially, the U.S. Federal Reserve is hawkish and the Bank of Japan is dovish. That means the advantage goes to the U.S. Dollar.

At 00:44 GMT, the USD/JPY is trading 110.896, down 0.024 or -0.02%.

The USD/JPY fell for a third straight session on Monday, tracking declines in U.S. Treasury yields, as investors continued to book profits after recent sharp gains and ahead of Friday’s U.S. jobs report, though the decline is being viewed as temporary.

Last week, the U.S. Dollar posted a modest gain against the Japanese Yen as investors looked to the Federal Reserve’s reduction of asset purchases in November and a possible rate hike late next year.

Cautious market sentiment due to COVID-19 concerns, wobbles in China’s growth and a Washington gridlock ahead of a looming deadline to lift the U.S. government’s borrowing limit has lent support to the dollar, seen as a safe-haven asset.

In late September, the Bank of Japan (BOJ) kept monetary policy steady but offered a bleaker view on exports and factory output, as Asian factory shutdowns caused supply-chain disruptions for some manufacturers.

Daily Outlook

In Tuesday’s economic news, the Tokyo Core CPI came in at 0.1%, below the 0.2% estimate but better than the previously reported 0.0%.

Traders showed no reaction to the news because the primary driver of the price action is U.S. Treasury yields. Ahead of the U.S. Non-Farm Payrolls report on Friday, yields could put in a choppy performance that will translate into a choppy performance by the USD/JPY also.

We could see further downside pressure into 110.596 to 110.246, but we don’t expect to see a change in the trend to down.