USD/JPY consolidating just below 109.00 level ahead of key Japanese data

• USD/JPY is consolidating just below 109.00 level ahead of key Japanese data.
• The pair surged for a fourth day on Monday as higher US bond yields drove the US dollar higher.

USD/JPY is consolidating just beneath the 109.00 level after hitting fresh highs since last June, having ended Monday’s session up about 0.4% or just under 50 pips. That marked four straight days of gains, during which time the pair has rallied over 200 pips from below the 107.00 level, a move of over 2.0%.

The driving force behind USD/JPY upside on Monday was US dollar strength. But attention is set to return to JPY during Tuesday’s Asia Pacific session, amid the release of a number of key Japanese data points.

First up, Japanese Household Spending data for the month of January is set for release at 23:30GMT, with spending expected to drop 3.1% on the month amid Covid-19 economic restrictions. On a YoY basis, spending is seen dropping 3.1%. Soon after, Japanese GDP data for Q4 2020 is set for release at 23:50GMT; economists expect the economy to have grown at a QoQ pace of 3.0% and at a YoY rate of 12.7%.

Dominant dollar

The US dollar was the dominant force in FX markets on Monday. Aside from GBP and CAD, which (strangely) managed to hold up pretty well, most of the dollar’s G10 peers fell to the pale, including the yen.

Market commentators largely attributed the rise in yields to the passage of US President Joe Biden’s $1.9T “rescue” package over the weekend. Where there is more disagreement is over whether yields are rising as a result of inflation/“over-heating” fears as a result of more stimulus being on the way, or over-optimism about how more stimulus is going to boost the long-term economic outlook. Either way, it seems to bode well for the dollar; if it is the former, that means tighter Fed policy. If it is the latter, that means a combination of even greater US economic outperformance than might already be priced in and tighter Fed policy. Or, at least, that is how markets seem to be seeing things right now.

Looking ahead, the key drivers this week for the US dollar include Wednesday’s Consumer Price Inflation data release for February and 10-year government bond auction. If the former is stronger than expected and the latter shows poorer than expected demand for US government debt, this would provide fresh impetus to the recent move higher in bond yields and would likely be USD bullish. Meanwhile, US Weekly Jobless Claims on Thursday and Producer Price Inflation and Michigan Consumer Sentiment on Friday will both also be in the spotlight.