USD/JPY Fundamental Daily Forecast – Sharp Break Erases July Labor Market Report Premium
The Dollar/Yen plunged on Friday to its lowest level in more than a week after confirming a bearish chart pattern from earlier in the week. The catalyst behind the sell-off was a weaker-than-expected consumer sentiment report, which drove U.S. Treasury yields sharply lower.
The move took the Forex pair below the August 6 low, wiping out all of the gains fueled by the recently bullish U.S. Non-Farm payrolls report. The move also suggests that some bullish traders may have taken an early tapering of the Fed’s stimulus program off the table.
On Friday, the USD/JPY settled at 109.603, down 0.830 or -0.75%.
Weak US Consumer Confidence Data Leads to Tightening of US Bond/Japanese Bond Spread
The 10-year Treasury yield dropped on Friday, briefly dipping below 1.3%, after U.S. consumer sentiment plummeted to its lowest level since December 2011, according to data from the University of Michigan. The move tightened the spread between U.S. Government Bond and Japanese Government Bond yields, making the U.S. Dollar a less-attractive asset.
The yield on the benchmark 10-year Treasury note fell 8 basis points to 1.287%. The yield on the 30-year Treasury bond gave up 9 basis points, falling to 1.937%.
Consumer Sentiment Measure Falls to Pandemic-Era Low, Sees One of Largest Drops on Record
A key consumer sentiment reading saw a dramatic drop in early August as the delta variant of COVID-19 increased fears about the path of the economy, the University of Michigan said Friday, CNBC reported.
The consumer sentiment index tumbled to 70.2 in its preliminary August reading. That is down more than 13% from July’s result of 81.2 and below the April 2020 mark 71.8 that was lowest of the pandemic era.
It was the lowest reading for the measure since 2011. Economists surveyed by Dow Jones were expecting a reading of 81.3 for August.
And a sudden drop of that magnitude is extremely rare for the index.
“Over the past half century, the Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy,” Richard Curtin, chief economist for the University of Michigan’s Surveys of Consumers, said in a release. Two of those larger month-over-month movers were April 2020 amid the pandemic and October 2008, during the financial crisis, CNBC wrote.
Price Action Suggests Building Negativity May Encourage Fed to Delay Any Tightening Plans
The U of M consumer sentiment report and the subsequent reaction by U.S. Treasury yields, the U.S. Dollar and Japanese Yen suggests consumers are reasoning that the U.S. economy’s performance will be diminished over the next several months.
If Federal Reserve officials feel the same way then they may lean toward the dovish side in their next meeting on September 21-22.
Wiping out the gains attributed to the bullish July Non-Farm Payrolls report suggests investors have already moved on from this data, and may be looking forward to weaker labor market data in August due to the reinstatement of mask mandates and other health restrictions in several states.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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