USD / JPY Fundamental Daily Forecast – Long sell-off continues after Powell sounds the Dovish alarm
The dollar / yen is trading lower early Thursday, following a decline after a sharp pause, the previous session was fueled by conciliatory comments from Federal Reserve Chairman Jerome Powell. Powell reassured investors on Wednesday that he was in no rush to tighten his policy.
Powell said in testimony to Congress that high inflation seemed linked to the reopening, that it would be a mistake to act prematurely to tame it, and that cutting bond purchases was “still a long way off.”
At 05:06 GMT, USD / JPY is trading at 109.838, down 0.100 or -0.09%.
The spread between US government bond yields and Japanese government bond yields narrowed on the announcement, making the US dollar a less attractive investment.
Fed’s Powell sticks to jobs recovery script, feels heat on inflation front
Federal Reserve Chairman Jerome Powell on Wednesday pledged “strong support” to complete the United States’ economic recovery from the coronavirus pandemic, but faced some heated questions from Republican lawmakers concerned about the recent spikes in inflation, Reuters reported.
In his testimony before the U.S. House of Representatives Financial Services Committee, Powell said he was convinced the recent price hikes were associated with the country’s post-pandemic reopening and would fade away, and the Fed should stay focused on getting as many people back to work as possible.
Any move to reduce support for the economy, by first slowing the US central bank’s $ 120 billion in monthly bond purchases, is “still a long way off,” Powell said, with $ 7.5 million. jobs still missing before the pandemic.
“The high inflation readings are for a small group of goods and services directly related to the reopening,” said Powell, in language that indicated he saw no need to rush the shift to post-pandemic policy. At this point, the Fed plans to continue buying bonds until there is “further substantial progress” on employment, with interest rates near zero likely until at least 2023.
Powell’s testimony means the monetary taps will stay open and interest rates will stay low. Bond traders were right to drive yields down to February lows. The bulls in the dollar / yen were wrong in betting on an anticipated drop by the Fed. The USD / JPY must therefore fall in the short term as it is overvalued relative to the yield level.
Watch out for the downside if the 10-year US Treasury yield falls below its July 8 close at 1.30%.