USD/JPY Fundamental Daily Forecast – Interest Rate Differential, Not Headlines Driving Price Action

The Dollar/Yen closed lower on Friday, confirming the previous session’s potentially bearish closing price reversal top chart pattern. The selling was primarily fueled by a drop in U.S. Treasury yields following a weaker than expected U.S. retail sales report. This followed a volatile week in which the U.S. Dollar surged against the Japanese Yen in the wake of a sharp rise in U.S. consumer inflation.

On Friday, the USD/JPY settled at 109.367, up 0.764 or +0.70%.

Treasury Yields Fall After Retail Sales Data

U.S. Treasury yields fell on Friday after retail sales data for April showed no growth after a big jump in March.

The yield on the benchmark 10-year Treasury note slipped to 1.645% in afternoon trading, while the yield on the 30-year Treasury bond dipped to 2.371%.

Yields were weaker ahead of the retail sales report and then fell further once it hit. The drop in Treasury yields tightened the interest rate differential with Japanese Government bond yields, making the Japanese Yen a more attractive asset.

U.S. retail sales unexpectedly stalled in April as the boost from stimulus checks faded, but an acceleration is likely in the coming months amid record savings and a reopening of the economy.

The Commerce Department said on Friday the unchanged reading in retail sales last month followed a 10.7% surge in March, an upward revision from the previously reported 9.7% increase. Economists polled by Reuters had forecast retail sales would rise 1.0%. Economists polled by Dow Jones had expected a more modest 0.8% increase.

Still Feeling the Effects of Strong US CPI, PPI Data

On Thursday, a government report showed U.S. producer prices rose 0.6% in April after surging 1.0% in March. In the 12 months through April, the PPI shot up 6.2%. That was the biggest year-on-year rise since the series was revamped in 2010 and followed a 4.2% jump in March.

In a separate report, the number of Americans filing new claims for unemployment benefits dropped to a 14-month low of 473,000.

The strong data, coming after a stunning jump in consumer inflation announced on Wednesday, added to the evidence inflationary pressure is building up in the United States as vaccine rollouts prompts economic normalization.

Japan Service Sector Sentiment Worsens in April

Japan’s service sector sentiment index fell to 39.1 in April, down for the first time in three months, a Cabinet Office survey showed on Thursday, amid uncertainty over the resurgence of the COVID-19 pandemic.

The survey of workers such as taxi drivers, hotel workers and restaurant staff called “economy watchers” for their proximity to consumer and retail trends – showed their confidence about current economic conditions fell from 49.0 seen in March.